If you've been paying attention to crypto over the past year or so, you've probably felt something weird.

Things look great on paper. ETFs have bought billions of dollars of Bitcoin and Ether. The President of the United States is talking about Bitcoin reserves and launching projects of his own. And yet, crypto feels dead.

There's still activity -- of course there is. Chains continue to chug along, new metas come and go, and the underlying infrastructure continues to improve from an already better-than-ever-before level.

But the vibe has gone.

There's no excitement. No big dreams or bold claims about how crypto will change the world. No hope.

And, quite concerningly, there isn't a single, clear reason for this.

I think almost everyone in the industry, every member of every group that has ever believed in this space for their many different reasons, has been simultaneously disappointed over the past year.

And those collection of disappointments have sucked the air out of the room and given the sense that the crypto dream is pretty much over.

Let me explain.

Crypto's Curious Coalition

Crypto's audience has always been a curious coalition of different people. But, I think you can broadly group them into two categories.

First, there are the Cypherpunks.

For simplicity, I'm applying this label to everyone who primarily views crypto as a tool for disruption and maybe even revolution.

They may not all be cypherpunks in the strictest sense, but in general they hope that crypto will be used to liberate the masses, to increase privacy, and escape the surveillance state.

They want to use this technology to build a freer and fairer world than we currently occupy.

As such, they are generally opposed to the major corporations and institutions that govern the world today. They don't necessarily want to burn it all down, but they certainly don't love or trust them.

The second group are Speculators.

These are the people who are interested in crypto primarily as a way of making money, not enacting change. In fact, many of them are quite nihilistic.

At the end of the day, they just want to make as much money as they can. Ideally in the shortest time possible. Therefore, they love the memecoins, pump-and-dumps, and get-rich-quick schemes that the Cypherpunks would look down on as wasteful distractions.

Of course, there is complexity here; some individuals don't sit cleanly in either field. But these archetypes broadly describe crypto's audience and the tension between the different factions.

Cypherpunks and Speculators aren't natural bedfellows. In many cases they won't like each other. But crypto has given them a way to coexist.

The Speculators help to fund the projects that the Cypherpunks believe in. Meanwhile, the Cypherpunks give the Speculators narratives they can trade -- and also shield their true ambitions with. After all, it sounds much better to claim they are participating in a revolution rather than just gambling. It helps draw in the crowds they can profit off.

However, the relationship between these groups has started to degrade in recent years. And things came to a head in 2025.

See, traditionally, the energy and relative power of each group has swung back and forth like a pendulum. If one group felt lost or depressed, there was at least some solace to be found in the success and excitement of the other camp.

The Speculators feel euphoric and empowered as prices rise. Their energy and enthusiasm can even infect some of the Cypherpunks.

Then, when prices fall and bear markets set in, the Cypherpunks take charge. They can use their newfound wealth to brighten the darkness and power forward with new developments -- developments that the Speculators can get behind, starting the cycle all over again.

But, last year, for the first time in crypto's history, both groups were consistently and simultaneously disappointed. Both by each other and crypto as a whole.

And this is where crypto's 'dead' feeling comes from. Wherever you looked, there was a sense of disappointment and failure. It wasn't even possible to take comfort in the fact that others were doing well.

The Price Problem

Let's start with the most obvious issue: prices have stopped going up.

Bitcoin pushed through the $100k milestone at the end of 2024, prompting fevered speculation about where it might end up... And then it stalled out.

Since then, price action has been fairly stagnant. Bitcoin has consistently hovered between $80,000 and $120,000 -- seemingly spending most of its time in the lower part of that range.

And that is despite significant buy pressure from ETFs and the steady trickle of institutional dollars that everyone expected to turbocharge prices.

Worse still, gold and precious metals had a barnstorming year.

Seeing them succeed while bitcoin flatlined was hugely disappointing, doing massive damage to Bitcoin's reputation as a digital alternative to shiny metal.

And if it was underwhelming for bitcoin, it was even worse for altcoins.

The market finally capitulated on the multitude of worthless tokens that largely exist to make insiders and VCs rich. Prices and liquidity fell across virtually every sector and every asset.

Even the handful of coins that arguably are worthwhile and valuable haven't been spared -- either because they are collateral damage in a collapsing market, or perhaps because they've always been overvalued in an industry driven by hype.

Again, this served to pour cold water on one of crypto's big remaining narratives: the idea that it serves as an "asymmetric bet" enabling easy money and quick wins.

As a result, it was a bad year for the Speculator class, and the 10/10 market crash was salt in the wound.

The lucky ones made it out with substantially reduced profits. The rest suffered demoralising losses.

And, crucially for the vibes in the industry, many have been left questioning if it's worth keeping a substantial portion of their net worth in digital assets. Maybe they'd be better off looking elsewhere -- especially when we consider the second big issue crypto is facing today.

The Good New Is Priced In

There's a deeper problem behind the disappointing price action.

Markets are forward looking. They try to price in events that are likely to occur in the future. As a result, the major events that we call "catalysts" only matter if people don't know they are coming.

And the bad news is that since Trump's win in November 2024 -- perhaps even since the arrival of spot ETFs -- everybody had a good idea of what would be happening in the future.

Once upon a time, the ETFs were something to look forward to. To price in.

When they happened, they were a massive deal. They were even a rip-roaring success, sucking in billions of dollars at some of the fastest rates in ETF history.

But now they're just a thing that exists.

The same goes for the institutional pivot to crypto. Kind remarks from the likes of Larry Fink, or big banks suggesting they would use or invest in crypto, used to make headlines and drive conversations for days.

Now it's just an event that happens on a semi-regular basis. It's almost a given that major corporations would have some kind of crypto-related activity today.

Then there's regulatory clarity. We've seen a bit, but the projections may actually have been overoptimistic here. Real change looks much less likely than many would have hoped this time last year.

At least there's SEC is onside and has ceased hostilities. For now. Still, that would have been priced in at the time of the election.

Virtually everything we've seen in crypto of late, every piece of good news and meaningful progress, had been discussed, analysed, and priced in well before they occurred in reality.

And now markets, and the Speculator class that drive them, are looking ahead and asking: "what next?"

What other major events could be coming up that aren't already on the radar? What do we have to look forward to?

And the answer, right now, is not much.

The big structural wins, the things that were supposed to change everything, like ETFs and a pro-crypto president, are here. And prices topped out on their arrival. But there was nothing else coming down the pipe to drive excitement and push prices higher.

And this isn't just painful for the Speculators. Just as markets are forward looking, individuals are too. They need hope. And without clear catalysts on the horizon, even the Cypherpunks feel the weight of the malaise.

When Winning Feels Like Losing: Trump Edition

Next, we have the "be careful what you bargained for" situation, where some of those good things that had been priced in turned out to be... well, not so good.

The obvious one is Trump.

Many crypto advocates have long dreamed that governments and policymakers would open up to crypto, to tolerate it and regulate it sensibly. They didn't necessary want a supportive administration, just one that wasn't actively seeking to harm the industry whenever it got the chance.

Therefore, Trump's embrace of crypto ahead of the 2024 election felt like a revelation.

Not only would crypto finally get a fair shake from the US government and its regulatory bodies, it would be actively encouraged.

Finally we might see positive, proactive regulations to foster certainty while protecting many of crypto's special properties. We might see a thumbs up for TradFi to start getting involved. We might even see a Bitcoin reserve that would solidify its status as digital gold.

There was something here for all but the most extreme, most anti-institution Cypherpunks to get excited about. And, as we saw earlier, it was exactly the kind of catalyst that Speculators love to trade on.

It should have been a massive win, for everybody. But then it wasn't.

Trump's Crypto Ventures

Shortly before his second inauguration, Trump decided to launch a memecoin. And then a second memecoin, this time for his wife.

This was a gut punch for the Cypherpunk side of the industry. The supposedly pro-crypto President was leaning into what they consider to be one of the industry's worst aspects, and making the whole thing look like a joke.

Even the Speculators were left reeling as both coins plummeted in value and, quite predictably, insiders made off with most of the gains.

Trump's venture into DeFi with World Liberty Financial has been equally questionable.

At its best, this could have been an opportunity to promote some of crypto's more innovative and exciting developments. Instead, it's just another thing for critics of both Trump and crypto to point to, highlighting corruption and greed and -- once again -- shining a light on some of crypto's least desirable traits.

To the Cypherpunks, it's clear that Trump has entered crypto on the extreme end of the Speculator side of the spectrum. I think that would be demoralising on its own. But it has also led to larger problems.

The blowback from Trump's antics have delayed significant new regulation that could have put the industry on a stronger footing. Now politicians must waste time arguing about how to prevent conflicts of interests and ethical issues in future presidencies.

Worse still, his behaviour risks exacerbating crypto's partisan appeal -- something the industry has been working hard to overcome. There's no way of knowing how severe the repercussions of this could be in the long term.

The Biggest Fumble

But all of these failures pale in comparison to his biggest fumble: delivering the Strategic Reserve.

This should have been an easy win: anointing Bitcoin as a true alternative to gold, declaring it a macro asset worthy of nation-states. But somehow even this went wrong.

The message was confused and diluted by the creation of not just a Strategic Bitcoin Reserve, but a second, entirely unnecessary Digital Asset Stockpile holding a basket of altcoins.

I suspect the inclusion of XRP and Cardano in this basket was particularly painful for many in the Cypherpunk crowd, given how widely they are mocked as joke projects exclusively backed by naive newcomers.

But the bigger problem is one of optics.

The second fund made the announcement look more like a corrupt kickback to donors and allies from the crypto industry, rather than a thoughtful or strategic move to safeguard something valuable.

Small Wins

Of course, it hasn't been all bad. We've seen a few positives.

The GENIUS act for stablecoins was passed in July, providing some additional clarity for that portion of the market. And the SEC has become much more friendly to crypto -- though, without underlying regulation to crystallise these changes, there's nothing to stop this reversing under the next administration.

But these are hardly the epic wins and big-picture changes people hoped a crypto-friendly president would bring about.

The Cypherpunks especially hoped for a President who would protect privacy, decentralisation, and personal freedom. They wanted someone to promote Bitcoin as a store of value worth holding, and to highlight the positive changes that this technology could unlock.

At the very least, they wanted someone who would put a permanent end to the regulatory hostility and ambiguity that has plagued the industry since inception. Even that looks unlikely now.

Crypto certainly isn't in a worse place than before Trump's second term -- I don't think anyone would claim that. But it isn't radically better either. And that's a massive disappointment when you think about where we could have been.

When Winning Feels Like Losing: ETF Edition

The ETFs are another example of "wins that feel like losses."

They're clearly a step forwards in terms of accessibility and ease of use. They slot beautifully into the traditional financial system, letting people hold Bitcoin, ETH, and other cryptoassets right alongside the stocks and shares they already own. And they come with the endorsement and protection of widely trusted financial giants like BlackRock, who will look after your bitcoin for you.

Except, for the Cypherpunks, that's the problem.

Crypto, and Bitcoin in particular, was built to be yours. To be owned, held, and used by you. With no intermediaries. No custodians. No gatekeepers of any kind.

The main aim was freedom.

But now the largest holders of Bitcoin are almost entirely institutional custodians. Or, casting an even wider net, custodians and treasury vehicle companies like MicroStrategy.

So, although many Cypherpunks will appreciate the way ETFs make crypto more mainstream and more palatable, which might help to spread its message a little further, they're likely to find them bittersweet at the very least.

This victory in terms of adoption has come at the cost of crypto's fundamental nature -- and it's a change that is extremely unlikely to be undone.

It's easy to see why this would be dispiriting for the Cypherpunks. It's easy to see why it might even turn some away from crypto entirely.

An Innovation Graveyard

The ETFs and institutional adoption have robbed crypto of much of its rebellious character and freedom-loving nature. But, at least the frontier spirit can still be found amid the technical innovation and revolutionary ideas pumped out crypto's "shadowy supercoders", right?

Well... no.

It kind of feels like the major innovations have dried up and there's nothing new to discover.

Previous crypto cycles were built around a series of newly created categories within crypto. These were obvious innovations that felt revolutionary and hinted at incredible futures.

ICOs were a new form of fundraising, democratising access to early stage investments and the generous returns they could offer. DeFi did for finance what Bitcoin did for money, cutting out intermediaries and inefficiencies that degrade the TradFi experience. And NFTs promised to change the world of art, entertainment, and digital ownership forever.

Of course, none of these things went entirely to plan.

Many of the claims made about each of these categories in their early days were rather naive. The rosy futures we envisaged are either much further away than initially hoped, or entirely unrealistic in reality.

But I think everyone, deep down, kind of knew that all along. And it didn't matter.

Because everyone knew these were bold and exciting ideas. They gave everyone something to work towards, to imagine, to believe in. Even some of the Speculators got caught up the fantasy.

But, if you look back over the past couple of years, what do we see?

No new categories. No innovations. Nothing to dream about. It ties back to the lack of catalysts I mentioned earlier.

Instead, the biggest trend in 2024 and 2025 was hypergambling.

This was primarily driven by memecoins and things like Pump.fun, but it also covers people's obsession with perps platforms like Hyperliquid and arguably even prediction markets like Polymarket. Even short-lived trends like AI-coins that purported to be innovative were little more than memecoins in disguise.

It's hardly on par with the grand inventions that excited the Cypherpunks in previous years. It may have just about satisfied the Speculators. But, even for them, it feels like a lot of empty calories. Surely they would prefer a much more substantial, long-lasting trend that the masses could get behind.

Ultimately, it's hard to escape the feeling that crypto has run out of new territory to explore.

It seems like we have now tried everything crypto is capable of, so all we have left is to double down on what works. And, clearly, hypergambling and financialisation are some of the key strengths.

It's not that they are the only success stories -- just the loudest and, sadly, perhaps the least inspiring.

Elsewhere, stablecoins are another clear winner. DeFi is still around and performing admirably, though there was a worrying wobble when Balancer was hacked last year. And L2s and the broader scaling roadmap is rolling out largely as expected.

Now it's just about iterating on and refining these concepts, which isn't nearly as exciting as discovering new applications.

Perhaps the best thing we can hope for is a revisiting of old ideas now that the underlying technology has improved. But, again, that won't feel revolutionary or exciting. Especially for the grizzled veterans who are likely jaded after having their dreams crushed long ago.

At the end of the day, when so much of crypto has been underpinned by hype and inflated ideas for so long, these smaller-scale developments seem boring. It feels like something special has died.

The Grass Is Greener

I've already mentioned how Bitcoin has lost some of its shine thanks to gold's outperformance. But there is another "grass is greener" story that has affected the entire market, alts included.

Just as crypto has started to slow, AI has exploded onto the scene with its own dramatic developments and bold promises.

Now, if you want to be where the action is, if you want a shot at participating in a world-changing events, you need to be involved with AI.

Crypto is, at best, an afterthought. It may come up when discussing how our AI overlords will one day pay each other, but that's about it.

This is another blow for some of the Cypherpunks. Another reason for them to abandon crypto and turn their attention elsewhere.

And it's another, far more compelling opportunity for the Speculators to pursue as well. It's a new bubble forming, with billions of dollars rushing in from all over the world, and plenty of potential catalysts on the horizon that could keep things moving.

With AI as the hot new thing, crypto looks like yesterday's revolution. Once again, it looks like its light is fading.

The Dream Collides With Reality

So, here's what this all boils down to: crypto has finally run into reality -- and reality is far less exciting than the wild dreams the industry used to have.

Crypto dreamt about delivering dramatic, revolutionary changes that would ensure freedom and self-sovereignty for all. The harsh reality is that is has been co-opted. It won't revolutionise anything. Instead, the institutions it sought to replace will integrate the technology to incrementally improve their existing offerings. Developments will slow, regulations will be imposed, and intermediaries will... well, intermediate.

And, we should have expected this.

In fact, I think many, to a large extent, did expect it. They just didn't want to admit it. Because no one wanted to acknowledge that this revolutionary new technology would one day become just another asset for people to use and trade.

But, at the end of the day, adoption requires compromise. Industries and technologies get boring as they mature. The rate of change decreases.

This is a bitter pill for the Cypherpunks to swallow. Yes, they won in the sense that crypto is now legitimised and seeing genuine adoption. But it cost them almost everything that made crypto special to them. They are once again locked in the system that they wanted to escape from.

Meanwhile, the Speculators have lost their fast-money opportunity. The clash with reality has been particularly painful and damaging for many altcoins, whose worthlessness is undeniable in the cold light of day, and which may never recover. Crypto's future is likely to be a steady grind that could last for years or even decades -- much like tech stocks after the dot-com bubble. Hardly the environment for someone who wants to get-rich-quick.

So nobody, from crypto's core group of constituents, is happy. And when nobody is happy, and the energy and excitement have left the room, the space is left feeling quite dead.

So, What's Next?

Of course, crypto -- and Bitcoin in particular -- has been proclaimed dead time and time again, and those arguments have always been wrong before. This time isn't too different.

Crypto isn't gone. The technology clearly works -- better than ever, in fact. The infrastructure is still there and is, as we've seen, slowly improving.

But, this time, the proclamations are true in that the vibe really has died. That sense of possibility. The idea that we're on the frontier, building or exploring something novel and revolutionary. It's gone.

And we're left with something less glamorous. Less colourful. Less exciting.

And this more staid environment provides fertile grounds for a new, rapidly growing and now-dominant cohort into crypto's curious coalition. Let's call them the Professionals. They sit somewhere between the Cypherpunks and the Speculators.

They aren't as ideologically driven as Cypherpunks. They don't want to radically reshape the world. But they do want to solve some problems and, as we've seen, incrementally improve things.

And they like money -- they certainly want to make some for themselves -- but they aren't as extreme or as extractive as some of the Speculators. They are happy to grind away for a decade to make bank, they don't need their riches tomorrow. And they probably won't be throwing money at ludicrous coins of dubious value.

They're the kind of people who would work on stablecoins at Stripe, or at TradFi giants integrating crypto infrastructure. They're the serious, serial founders who are replacing eccentric visionaries of crypto's past.

Institutional money requires institutional talent, which the Professionals clearly are. But they're boring relative to the pirates and pioneers who came before them.

Crypto's dead and empty feeling is the inevitable result of handing the baton off to this new group of comparatively dull participants. The future of the industry is in their hands.

Perhaps there's still a way to wrestle control back from them.

Maybe we will still see a genius idea that transforms things, re-energising the Cypherpunks and giving the Speculators something to get behind.

Maybe we'll see the old guard fighting back. The recent resurgence of privacy coins, combined with Ethereum's Cypherpunk-aligned community finally getting its act together, hints that it could just about be possible.

Most likely, we'll see a fragmentation.

Crypto will enter a new era. One where the less extreme Cypherpunks and Speculators will give up their wild dreams and join the Professionals in their journey, doing what little they can to maintain a semblance of the old ways. Meanwhile, those on the fringes will break away and explore new opportunities or build elsewhere.

But crypto hasn't died. And it won't, even if this comes to pass.

It may be tamed and transformed. It may lose many of its ideals and characteristics and excitement. But, for those who chose to remain, crypto is very much still alive -- it's just something less than it used to be.

Disclaimer

Anything expressed here is my own opinion stated for informational and educational purposes; nothing I say should be taken as investment or financial advice. Many projects mentioned on this channel are highly experimental and therefore come with risks. Please evaluate your own risk tolerance before experimenting with these projects.

I may own some of the cryptoassets mentioned.

And, I think this is a much more interesting update than Pectra, which hit mainnet in May.

It not only has a dramatic headline feature in the form of PeerDAS, which makes it technologically more interesting, but it's also Ethereum's most carefully considered and strategically aligned update ever.

In this way, Fusaka is representative of a much larger change in Ethereum's community and culture -- a change that has been clear online in recent months but hasn't, until now, had a truly tangible impact.

Fusaka is proof that Ethereum is on a war footing and finally responding to the ever-increasing competition from chains like Solana.

So, let's dig in and see what Fusaka is all about.

Overview

As I've covered before, Ethereum upgrades are really a pair of upgrades: one on the Consensus Layer and one on the Execution Layer. In this case, they are called Fulu and Osaka respectively. "Fusaka" comes from combining those names together.

It's scheduled to arrive on December 3, at slot 13,164,544.

Fusaka contains 12 EIPs (changes) that are designed to increase Ethereum's throughput, make it an even better foundation for Layer 2 chains, and improve the user experience.

Why Fusaka Is So Exciting

I think it's worth noting the context that Fusaka arrives in, as it is the first update to have been properly shaped by changes made at the Ethereum Foundation (EF) earlier this year.

The EF is the non-profit organisation established in 2014 to steward Ethereum and support its development. But it had faced significant and growing criticism for things like poor communication, slow execution of ideas, and a general inability to recognise or respond to the competitive pressure Ethereum has come under in recent years.

As a result, the EF underwent a big shakeup in March of this year, appointing a pair of Co-Executive Directors to oversee things.

Then, after just a month in their new roles, these Directors published a blog post detailing their new strategic objectives. These were scaling the Ethereum mainnet; scaling blobs; and improving UX -- all without compromising Ethereum's existing security or hardness.

Looking at Fusaka, it's notable how every change clearly aligns with these objectives. It's easy to categorise all of the EIPs according to which strategy they support -- though some do span more than one category.

• Scale L1: EIP-7642, EIP-7823, EIP-7825, EIP-7883, EIP-7934, EIP-7935, EIP-7939

• Scale Blobs: EIP-7594, EIP-7892, EIP-7918

• Improve UX: EIP-7917, EIP-7951

Additionally, some of these changes also relate to an implicit, community-driven objective of driving more value accrual to Ether -- something that has been overlooked in the past but would clearly make ETH a more attractive asset.

None of this may sound revolutionary.

Frankly, this is how updates should have been designed from day one.

But, historically, most of Ethereum's upgrades have felt like a grab-bag of different ideas, and therefore they failed to give the impression of a network making meaningful progress towards desired goals.

The last update, Pectra, was a good example of this unfocused approach. My assessment at the time of that update was that, while everything it delivered was good, it lacked a clear focus and therefore felt listless and uninspired. It certainly didn't deliver anything like the change that the Ethereum community was demanding at that particularly dark and challenging time.

And that's what makes Fusaka so exciting. It's not just what it's delivering, it's how it's doing it.

Fusaka is the first update for a long time that makes you feel like Ethereum is delivering meaningful change, that it can solve the key issues that have blighted the platform for so long, and that it can truly compete with the ever-growing collection of supposed 'Ethereum-killers'.

So, let's unpack those changes now and see how they relate to Ethereum's new goals.

Scale Blobs

We'll start with blob scaling, as this is the focus of Fusaka's headline change.

As a quick reminder, blobs were introduced in early 2024 and provide a temporary storage space for L2 data on Ethereum. They are Ethereum's Data Availability (DA) solution.

You can think of them as literal blobs that stick to the outside of Ethereum blocks so they can be passed around to all the nodes in the network. But, after a short amount of time, they can be picked off and discarded by anyone who doesn't want to permanently store that data.

Each blob is paired with a transaction that remains inside the block, even after the blob has been removed. This transaction contains a commitment to the blob data -- this is essentially a special reference that can be used to prove that some data is indeed in a blob.

There are two key things to remember as we dive into Fusaka's changes. First: every node in the network currently has to download and verify every blob in its entirety. Second, as I just mentioned, every blob has a corresponding transaction that is contained inside the block.

PeerDAS (EIP-7594)

EIP-7594, better known as PeerDAS, focusses on the first of those things to remember.

It will allow nodes to verify blob data using just a fraction of the blob -- so they will no longer need to download the entire thing. In fact, most nodes will download just 1/8th of the blob's data.

What's more, so long as nodes across the network all hold truly random fractions of the blob, the entire blob could be reconstructed with just half of the data.

This is made possible using some clever maths called 'Reed-Solomon erasure-coding', which is the same thing used to make DVDs scratch-resistant.

In Ethereum, it will allow additional blobs to be added to blocks.

Because most nodes will only download 1/8th of the data, you could theoretically add 8 times as many blobs to blocks without increasing a node's workload or bandwidth requirements.

In short, Ethereum could vastly increase its DA capacity without increasing the burden on the network.

Here's how it works.

Under PeerDAS, blob data will be converted into a series of numbers that are taken to be coefficients of a smooth polynomial curve.

You'll probably remember polynomials from school as expressions in a form like: $$y = ax^2 + bx + c$$. The polynomial created here will obviously be much longer and more complex, but it's essentially the same thing. And, here, it is also a compressed mathematical description of the original data.

Now, here's where it gets really clever.

If we imagine plotting that polynomial on a graph, we'd see that the line would continue on well beyond the original data.

In fact, we could keep plugging new numbers into the expression and generating new points on the same curve. And the crucial thing here is that these new points are still on the same curve -- they are still defined by the same expression.

Therefore, while they are 'fictitious' data points not included in the original blob data, they are closely related to it.

Ethereum will generate enough new points on the curve that it will effectively double the original data -- creating a lot of redundant points that can be used to reconstruct the original blob if necessary.

Next, it will batch all of these data points into 128 groups, called 'columns', so that each column contains a series of consecutive datapoints from the polynomial curve. Then, each column is distributed across its own, specialised subnet.

Every node in the network is randomly assigned at least 4 subnets based on its unique ID -- which should ensure a uniform, random distribution of all blob data.

And it's worth noting that some nodes will be required to subscribe to additional subnets.

Once a validator is tied to a node, meaning the person running that node is staking ETH and participating in block production, they will need to subscribe to 8 subnets.

If they stake more than 287 ETH, they will need to subscribe to more than 8 -- with the total number of subnets depending on the quantity of ETH staked.

Finally, anyone staking 4096 ETH or more -- the equivalent to two maxed out validators -- will be considered a 'supernode' and have to connect to every subnet. Therefore, they would receive every column and download every blob in its entirety. They are also expected to redistribute this information to the rest of the network to heal any gaps that may appear.

Of course, based on the amount of ETH they hold, these supernodes should be able to afford the overheads associated with all of this.

But, to reiterate, the key number here is 8.

The majority of nodes will only subscribe to 8 of the 128 subnets -- and therefore only receive 8 of the 128 columns. That's equivalent to 1/16 of all the data -- including the extended data. And, because the data was doubled for redundancy earlier in the process, this 1/16 is really just 1/8 of the original data.

That is where the big saving comes in. That is why PeerDAS could enable up to 8 times as many blobs.

It's also worth noting that each data point in each column will come with everything necessary to verify the data against the commitment contained in the block. So, no matter how many columns it receives, it can always be completely confident that the data it holds is correct.

Plus, as mentioned earlier, as long as anyone is able to collect at least half of these columns from across the network, they can reconstruct the entire blob. The way the data is distributed should ensure at least half of the data is always available, even in difficult and adversarial conditions.

So that is PeerDAS, an update that enables something Vitalik has described as "pretty unprecedented... a live blockchain that does not require any single node to download the full data".

That will let Ethereum increase the number of blobs it can offer Layer 2s for their data storage needs, making it a better foundation for the modular world and ultimately enabling greater throughput across the whole stack.

Blob Parameter Only (BPO) Hardforks (EIP-7892)

Although PeerDAS unlocks additional blob capacity, Fusaka won't immediately take advantage of it.

Instead, EIP-7892 introduces a new process for adjusting blob parameters, called Blob Parameter Only (BPO) forks, which will let Ethereum incrementally increase the number of blobs on offer.

Traditionally, hard forks -- network upgrades -- have involved complex changes and required significant coordination across the Ethereum ecosystem. Fusaka itself is an example of this kind of fork. BPO forks are much, much simpler.

They will only change 3 blob-related parameters: the target number of blobs, the maximum number of blobs, and the base fee adjustment factor that influences the cost of accessing blobs.

The idea is that the community can coordinate one of these BPO forks, increasing the target blobcount to a higher number, then wait and observe how the network handles the change. If everything continues to run smoothly, then it will be safe to arrange another BPO fork and repeat the process.

Perhaps you can think of BPO forks as a kind of 'dimmer switch' that can be gradually dialled up, as opposed to the 'on-off' switch used in traditional forks.

The first two BPO forks are already scheduled.

The first of these will go live on December 9, one week after Fusaka. It will raise the target blob count from 6 to 10 blobs, and the maximum blob count from 9 to 15.

The second is scheduled for about a month after Fusaka on January 7, and it will raise the target to 14 and the maximum to 21 blobs per block.

The expectation is that these BPO forks will continue for some time, slowly expanding Ethereum's blob capacity without endangering the network with any sudden spikes. Ultimately, it could reach something like 72 blobs per block down the line -- but that of course depends on how Ethereum holds up under the load of the additional blobs.

Blob Base Fee Changes (EIP-7918)

EIP-7918 is the final big change that Fusaka will make to blobs, and it's all about pricing them more effectively.

Essentially, 7918 will introduce a floor price for blobs so they don't get underpriced during periods of low demand. This should keep blob fees closer to the market clearing price which will, in turn, smooth fluctuations in demand and ensure blobspace is allocated more efficiently.

Remember how every blob is submitted alongside a transaction that contains a reference to the blob.

In the current system, this can cause blob pricing problems.

The cost of including the transaction in a block is often very large relative to the cost of the blob itself -- especially at times of low blob demand. Therefore, if blobs are running empty and Ethereum reduces blob fees, it doesn't stimulate demand in the way it should.

For instance, if a transaction costs $10, it doesn't matter if Ethereum charges $0.01 or $0.001 to access a blob: the total cost of the transaction remains largely the same, so no one steps in to make use of the 'cheap' blobs.

As a result, blobs can run empty for long stretches of time. Then, when demand returns, it can take more than an hour of over-target blob production to increase the price back where it should be: the market clearing price, when supply and demand are in balance and only the target number of blobs are being produced.

7918 ties the minimum blob fee to the transaction fee, ensuring blob fees are always a meaningful portion of the total cost paid by blob consumers. That should protect the price signal and prevent fees falling close to zero for lengthy periods.

It will also ensure blob fees better reflect the computational cost that blobs impose on the Ethereum network. And, it will create a stronger alignment between L2 usage and blob fee revenue, which will help Ethereum capture more value from the stack it supports.

Finally, this change can be viewed as Ethereum throwing its weight around in the DA marketplace. Instead of essentially giving blob space away with near-zero fees -- something that all the DA providers are currently doing -- Ethereum wants to sell to generate meaningful revenue.

Ultimately, it's betting that its superior network effects, security, and liquidity give it pricing power relative to competitors like Celestia.

Fidelity Digital Asset's analysis of this change suggest it could be worth hundreds of millions of dollars for Ethereum and that, had it been introduced when blobs first launched, it could already have raised almost $80m in additional revenue.

Of course, this is all revenue that would otherwise be going to L2s -- who may well change their behaviour, or even leave Ethereum altogether -- in an attempt to recapture it. so, it will be fascinating to see how the industry reacts to this change.

Scale L1

While the blob-related changes will grab headlines in Fusaka, the largest number of changes fall into the 'Scale the L1' category.

Increasing The Default Gas Limit (EIP-7935)

EIP-7935 is the most obvious change to highlight in this section as it is literally about increasing Ethereum's capacity at the base layer. It raises the block gas limit -- the size of a block in terms of how much computational effort it contains -- from 45m to 60m gas, a 33% increase.

This isn't considered a 'core' EIP, because Ethereum's validators are able to coordinate an increase in gas limit by simply signalling their readiness for it.

However, because any large blocksize increase should be thoroughly tested before going live, the EIP was included in Fusaka to ensure developers were preparing their clients for the additional workload.

As validators across the network have updated their software in preparation for Fusaka, the number of them signalling readiness for 60m gas increased until the network reached quorum at the end of November. Therefore, this change is actually already in effect -- before Fusaka has gone live.

Still, I wanted to mention it here as it's a large break from Ethereum's past.

Until February of this year, Ethereum hadn't increased its gas limit since the Merge in September 2022 -- despite continued improvements in consumer hardware and widespread criticism of Ethereum's limited throughput.

7935 is a sign that Ethereum is finally responding to that criticism, and showcases the EF's and the community's renewed focus on L1 scaling. It means Ethereum has doubled its capacity in just one year.

And it doesn't plan on stopping there. Instead, Ethereum is set to continue growing the base layer for the foreseeable future. Various optimisations and developments could allow Ethereum to triple its capacity each year for the next few years.

Fusaka includes 5 EIPs that will make this kind of scaling both safe and achievable.

Other Scaling Changes

This collection of changes includes EIP-7934, which adds a maximum block size measured in bytes to the limit measured in gas. Specifically, it limits blocks to a maximum of 10MB.

Whilst still large, it will stop blocks from becoming unreasonably heavy and propagating slowly across the network -- something that could result in temporary forks and disruption. It will also reduce the risk of denial-of-service attacks against Ethereum.

Another example would be EIP-7939, which introduces a new opcode to counts the number of leading zeros at the start of a 256-bit number. It may not sound like a particularly exciting change, but it will dramatically reduce the cost of certain operations and make some on-chain calculations much more efficient.

7939 is exactly the sort of update that can unlock additional performance from Ethereum's layer 1, especially when it's combination with other such changes.

Finally, I want to mention to EIP-7825, which caps the cost of a single transaction and stops them from hogging all the blockspace.

This change is very clearly focused on protecting Ethereum as it increases its block gas limit -- but it also keeps an eye on the future.

Because it limits how large a transaction can be, it effectively guarantees that blocks will contain multiple transactions. This is important because future Ethereum upgrades will introduce parallel processing of transactions, which would obviously not be possible if a single transaction could occupy all available blockspace.

Taken together, these EIPs, along with some others I haven't mentioned, will ensure Ethereum can scale safely and smoothly in the years to come.

Improve UX

I suspect that the blob and L1 scaling-related EIPs will garner most attention in Fusaka, but that doesn't mean it won't deliver significant UX improvements at the same time.

For me, there are two that stand out.

Deterministic Proposer Lookahead (EIP-7917)

EIP-7917 makes it clear which validators will be proposing blocks at a much earlier stage than we see today. Not only this, but the list of validators who will be proposing blocks will be completely deterministic and available onchain.

While this may not sound overly useful, it's actually incredibly important for the development of based rollups and preconfirmations.

Without going into all the details of what these terms mean right now, I'll just say that they could enable Layer 2 chains that feel truly rapid and more akin to web2 products -- all without sacrificing Ethereum's decentralisation or security guarantees. Based rollups should also drive more value to the L1 and, therefore, to Ether as an asset.

It's still early days for both based rollups and preconfirmations, so the UX improvements won't be immediate, but this change definitely lays the foundation for them.

And, as a nice bonus, it also closes off some niche attack vectors and further strengthens Ethereum's design.

Precompile for secp256r1 Curve Support (EIP-7951)

EIP-7951 is likely to have more of a UX impact in the short-term.

Essentially, it gives Ethereum native support for a cryptographic curve known as P-256 that is used widely used in everyday devices like your phone. In fact, P-256 is used in everything from Apple's Secure Enclave to Android's Keystore to WebAuthn passkeys.

As a result, once Ethereum supports this curve, wallets will be able to do away with seed phrases and rely entirely on device-level biometrics and pass keys. This means they will look and feel much more like the traditional web2 applications that most people are used to.

It's the sort of change that is easy to overlook because of its abstract and technical-sounding name, but it has the potential to completely transform the way people interact with Ethereum and significantly lower the barrier to entry.

Summary

Hopefully you not only have a better understanding of what Fusaka means for Ethereum, but you can see how clearly it supports Ethereum's strategic objectives.

This isn't Pectra's loose collection of incremental improvements, this is a bold, laser-focused upgrade promising to boost Ethereum's throughput, scale blobs to support greater L2 activity, and improve the user experience.

Crucially it does all of these things without compromising on security, without compromising decentralisation, and while keeping Ether's value accrual in mind.

Yes, Fusaka doesn't solve all of Ethereum's problems. And yes, some on Twitter will surely mock Ethereum's 'L1 scaling' as throughput continues to lag well behind big-block chains like Solana, even after it's recent doubling.

But Fusaka is 100% a step in the right direction, and it represents a much larger change than it delivers.

It may be too early to say Ethereum is back, but this update suggests its darkest days, wandering aimlessly in the wilderness, are firmly behind it.

Technically, Pectra is the largest upgrade Ethereum has ever seen because it features 11 different EIPs or changes.

But what will these changes do, and what will Pectra mean for Ethereum and its users? That's what I'm going to explore today.

Overview

As with all updates since The Merge, Pectra is a combination of Execution Layer and Consensus Layer upgrades -- in this case, Prague and Electra respectively. (See here for more on this).

But unlike some previous updates, Pectra lacks a dramatic headline feature for everyone to focus on.

Instead, it's better thought of as a collection of iterative improvements to various aspects of Ethereum, including accounts, staking, and blobs.

Staking will see the biggest changes, with 5 EIPs affecting this area. However, most users won't notice these. Instead, they're most likely to experience and benefit from an EIP introducing account abstraction features to existing wallets. But, more on all this shortly.

Interestingly, despite being chockful of changes, Pectra was almost even larger. At one point, almost twice as many EIPs were considered for inclusion before it was whittled down due to concerns about doing too much at once.

It has also faced a rather rocky road to mainnet, with two testnets suffering issues after receiving the update. However, it should be noted that neither of those incidents were because of issues in Pectra itself, and the upgrade has been successfully run on a newly launched testnet called Hoodi.

Now, with all that background out of the way, let's explore some of Pectra's biggest features.

Pectra Highlights

Account Abstraction

Because it's likely to be the most noticeable change, let's start by looking at EIP-7702, which enables users to transform their boring normal wallets into smart wallets with all sorts of fancy features. Essentially, it's the first step towards widespread account abstraction on Ethereum.

In Ethereum, traditional accounts controlled by private keys held in user wallets are known as 'Externally Owned Accounts' (EOAs). If you've ever interacted with Ethereum, or any similar chain, then you've probably done that with an EOA -- and so you'll know they're pretty limited. They certainly don't have smart features like the ability to batch multiple transactions into one or to pay transaction fees using alternative assets.

7702 will change this by introducing a new type of transaction that lets users delegate control of their EOA to a chosen smart contract, giving their account the smart contract's features and abilities.

Crucially, the user's account is ultimately still controlled by their private key, so they remain in complete control of their account at all times. If they want to retract their delegation, they can simply sign a new transaction to do that.

The idea is that users will opt into smart wallets with programmable features. These include gas sponsorship, where apps cover transaction fees so users can pay in whatever asset they like; transaction batching, which would remove the need to sign separate approval and swap transactions; as well as spending limits and other security and account recovery features.

As I understand, some developers wanted to push things further by introducing more ambitious changes relating to account abstraction. Perhaps those changes will come in time. But the beauty of 7702, and the reason it was included in Pectra, is that it fits cleanly into Ethereum's existing account infrastructure. Users can benefit from smart wallet features on their existing accounts, without having to migrate funds to new addresses or deploy expensive smart contract wallets.

Ultimately, it's a kind of 'best-of-both-worlds' approach that will hopefully bring some quality-of-life improvements to Ethereum users. I'm excited to see what's built with it.

Staking Changes

As mentioned earlier, staking is Pectra's biggest beneficiary, with 5 EIPs targeting this area.

Of those 5, one stands out above the rest: EIP-7251, or MaxEB. This raises validators' maximum effective balance, essentially the amount of ETH they can each stake, from 32 to 2048.

Today, all Ethereum validators -- the people who help produce blocks and keep the network running -- have an effective balance of 32 ETH. In other words, any ETH they hold or earn over this threshold doesn't count towards their voting power or make them any more likely to produce blocks. It's essentially wasted ETH.

Therefore, anyone with more than 32 ETH would need to run multiple validators if they wanted to stake it all. So, someone with 64 ETH would need to run 2 validators, someone with 96 ETH would need to run 3 validators, and so on.

That's not a great UX for stakers, who may have to manage multiple validators at the same time, probably on the same machine.

Worse, it's harmful for the Ethereum network, because all of those validators have to communicate and sign messages once every epoch (32 blocks). So there are a lot of messages being passed around, and a lot of bandwidth consumed, quite unnecessarily.

If everyone running multiple validators could consolidate their balances, it could significantly reduce those bandwidth requirements. Then, that bandwidth can be repurposed in more useful ways, such as increasing the size of blocks to squeeze in more transactions and reduce fees.

And that's exactly what EIP-7251 does.

By increasing the maximum effective balance from 32 to 2048 ETH, the update will enable many validators to consolidate their balance into one account. Plus, smaller stakers will be able to make the most of their earnings as every additional ETH they earn will count towards their staking balance.

A validator's voting power and probability of proposing a block will both scale with the number of ETH they stake. Someone with the maximum of 2048 ETH will 'weigh' 64x as much as someone with a 32 ETH validator.

It's important to note that none of this changes the security or decentralisation of the network. The number of actual people behind the validators will stay the same, it will just work more efficiently.

Some additional tweaks are required to get this working properly. For instance, the slashing risk for large stakers would increase slightly, and so the slashing penalty per ETH staked has been reduced to account for this. The EIP will also enable partial withdrawals and let users set a ceiling for their balance, after which any ETH earned could be withdrawn.

The other changes to staking are much smaller.

EIP-7002 will let validators control withdrawals using smart contracts on the Execution Layer rather than on the Consensus Layer, for example. And EIP-6110 fixes some technical debt from a pre-Merge world, enabling faster and less complex deposits.

Blobs & Calldata

The other update worth talking about is the changes to Blobs and calldata coming with Pectra.

Blobs are the containers attached to Ethereum blocks that hold arbitrary data. Because they can be safely discarded after a short time, they don't hurt Ethereum as much as calldata, which lets users store information inside blocks. Therefore, blob storage can be offered at a much lower price compared to calldata, making it ideal for L2s and their data needs. (I discussed this in more detail here).

Currently, Ethereum aims for 3 blobs per block and allows a maximum of 6 blobs per block.

Pectra will change this. EIP-7691 will double the target blob count to 6 per block, with a new maximum of 9 blobs per block.

That means Ethereum's data capacity will increase, making life a little easier for its growing L2 ecosystem. However, it's not a game changer -- and most Ethereum developers would happily admit to this. Really, this is a temporary increase to keep things running until PeerDAS arrives in Ethereum's next big upgrade, which will allow an even greater blob capacity.

At the same time, EIP-7623 will increase the cost of in-block calldata storage, helping to offset the impact of the additional blobs in worst-case scenarios.

Currently, calldata is priced at 16 gas per byte. Therefore, with the current 36m gas block size, a block could conceivably be as large as 2.2 megabytes plus blobs. 7623 will raise this to 40 gas per byte, capping blocks at 0.9 megabytes plus blobs. That's just a bit easier for the network to handle -- again keeping those bandwidth constraints in mind.

Together, this pair of upgrades will encourage L2s to exclusively use blobs for their storage needs, while the majority of transactions will be unaffected.

Roundup

That's really it for Pectra.

Of course, there are other changes in there, but they're not super interesting for most people. Overall, I think Pectra won't be particularly interesting for most people.

As I said at the start, there isn't anything dramatic or exciting here, it's just a collection of iterative improvements for Ethereum.

On its own, that wouldn't be a problem. But Pectra arrives at a difficult time for Ethereum.

Competitors like Celestia and, primarily, Solana are putting it under more pressure than ever before, surpassing it in key areas. Markets have punished ETH for its inability to capture value from L2s and its failure to compete with Bitcoin as a new form of money. Vibes have deteriorated and Ethereans have looked a little lost of late.

The sum of all of this is that Ethereum needs some dramatic changes to reset its narratives and re-energise the community -- and you can't describe Petra that way.

To be fair to them, the Ethereum Foundation and many leading developers have finally recognised the problems and are now talking a good game. But actions matter more than words, and real change will take time.

There's a possibility that delivering such an uninspiring and lacklustre update as Pectra will be oil on the fire for Ethereum's critics. The changes they're now talking about really need to be delivered today.

So the summary is: Pectra delivers some sensible and useful features, making things more efficient and introducing some new functionality. But, unfortunately, it's not the game-changer Ethereum really needs to reverse its fortunes.

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Ethereum may just be the biggest underachiever of the bull run so far.

ETH -- and ETH-aligned assets -- have seemed to lag well behind the likes of Solana through most of the bull run. And, with that, the vibes and narratives have shifted away from Ethereum and towards competing platforms.

However the unexpected approval of a spot ETH ETF may signal a change of fortunes for the second-largest cryptoasset.

And that's what I want to think about today.

Just why has Ethereum performed so badly in the bull run this far, and will the ETF be enough to turn things around?

Disclaimer

As always, none of this should be taken as investment advice. Nor is it a suggestion or recommendation to buy ETH or any other cryptoasset. And remember, if you do choose to invest in crypto, it is very risky and you can always lose what you put in.

With that out the way, let's get into it.

Why The Hard Times?

Over-performed In Bear Market

Price and narrative are deeply entwined and highly reflexive.

Price action drives narratives, and narratives drive price action.

When an asset's price changes, people like to attribute that change to a particular reason or narrative. And that narrative can attract additional capital to amplify the move.

In the right circumstances, this creates a great flywheel effect. The asset's price will keep moving in one direction, and the vibes around the asset will strengthen.

This is why we need to look back to the bear market to understand the beginning of Ethereum's troubles.

See, Ethereum held up relatively well throughout the bear, outperforming the vast majority of cryptoassets.

Crucially, it also bottomed earlier than most -- hitting its lowest point during the 3AC crash in June rather than the FTX collapse in November.

That meant ETH felt like it had more momentum than most assets through the bear, and the vibes around it were generally good. But there weren't so many people around at that time to appreciate this and buy in, so the flywheel never got going.

At the same time, the relative outperformance in the bear meant ETH was closer to its 'fair' price compared to most other cryptoasset. As markets improved, it had less ground to recover and less room to run. Once again, the flywheel wasn't running because there wasn't sufficient price action to drive it, even though overall market sentiment had improved.

Compare that to one of the cycle's more hyped assets, like Solana.

Solana had been beaten into the dirt during the bear. Its association with FTX meant it sold off hard, generating the narrative that Solana was dead. Some projects even abandoned the chain altogether, furthering that sense of despair.

All of this meant Solana was starting from a much lower place as we entered the bull market. SOL's price was dislocated so far from a fair value that it was able to rally hard as soon as the market sentiment turned. That created a sense of resurgence, which was backed up by Solana's true believers delivering new developments and rebuilding the ecosystem.

The narrative was therefore easy to build, easy to believe, and easy to buy into. And that's exactly what many investors and traders did. They piled into Solana and drove SOL ever higher.

For Solana, the flywheel was firmly in motion as the bull market began, while Ethereum seemed to be stagnating.

If ETH had performed worse through the bear and therefore had more room to recover, the vibe around it would probably be quite different today, even if the price ended up in more or less the same place.

But, it had the wrong price action at the wrong moment in time.

As it happened, Ethereum wasn't able to capture any momentum or attention as the bull run began, rendering it an also-ran in a fickle and forgetful market. A short -- and fairly understandable -- period of underperformance was all it took for the bad vibes to begin and a sense of malaise to set it.

The Narrative Squeeze

Worse still, the assets that experienced the biggest flywheel effect in the early bull market were the worst ones from Ethereum's perspective.

Ethereum has always occupied a slightly strange place in the market and has had a difficult time positioning itself properly.

On one hand, it's a smart contract platform and therefore ostensibly a tech play in competition with other platforms like Solana or Avalanche.

On the other hand, it's very focused on robustness, reliability, decentralisation, and creating a strong and sound money. That places it firmly in competition with Bitcoin.

It also creates a sense of conflict in Ethereum's design as it struggles to bring these competing aims together.

It must be relatively conservative to satisfy its Bitcoin-like desires. That leaves it unable to adopt an aggressive, high-throughput/low-fee design like many other smart contract platforms. And yet it will never be as simple or conservative as Bitcoin itself.

Ethereum must fight on both fronts with a hand tied behind its back. It's already at a disadvantage.

And then, as the bull run began, it was Bitcoin and Solana that performed the best and gained the most attention. They took narrative dominance, squeezing Ethereum on both sides.

The idea of Solana's resurgence made people think that it could steal Ethereum's thunder as the leading smart contract platform. Its low fees and -- initially -- superior user experience made it feel like the future.

Why would anyone want to build on or use Ethereum if they could do the same sort of thing in a faster, cheaper, simpler -- and altogether better -- environment? Especially when most people don't care about 'money-ness' and decentralisation like Ethereans and Bitcoiners do.

At the same time, Bitcoin was being propelled by both ETFs and its burgeoning ecosystem that consisted of Ordinals, fungible tokens, and proto-L2s.

The ETF narrative gave a sense that bitcoin was the only serious asset in crypto that institutions could get behind. The 'digital gold' argument seemed to be finally paying off as billions of dollars flooded into the newly launched funds.

Meanwhile, the growth of Ordinals proved that Bitcoin could be used for more than just money. Like Ethereum, it might also be a foundation for more complex computations and transactions.

If it could do that while being more conservative and more economically sound, then what would be the point of Ethereum? Surely anyone who truly cared about decentralisation and robust, reliable blockchain designs would pivot toward Bitcoin?

And if all that wasn't bad enough, Ethereum was even suffering in its relatively new 'modular' narrative as well.

Ethereum is supposed to become the base layer of an expansive, interconnected universe of chains and higher-layer scaling solutions. But that wasn't its original plan and it's slowly moving in that direction, one upgrade at a time.

But then Celestia launched, a new modular chain specifically built to serve the kind of role Ethereum will eventually fulfil. And, like Bitcoin and Solana, it performed very well financially and narratively in the early days of the bull market. Once again, Ethereum was made to look a bit pointless.

Almost every Ethereum narrative was being undermined simultaneously, compounding the lingering negativity that came from its own mediocre price action.

The excitement and attention had all moved elsewhere, and Ethereum was left feeling like a purposeless relic of the past.

In my opinion, this narrative assault is the primary reason why everyone has been so down on Ethereum so far. Its very existence, its reason for being, had been called into question. And, without a surge in activity or price, it wasn't able to give a convincing answer.

A Lack Of Buyers

Another contributing factor to Ethereum's lacklustre price action (and resultant negative vibes) is the lack of buyers coming to support the price.

Again, this is a case of Ethereum's previous strength coming back to haunt it.

In the previous cycle, Ethereum was the consensus bet.

ETH was almost the default asset for anyone serious about crypto.

Bitcoin, the former consensus play, had started to feel a little too old and out of touch. It was generally viewed as a played-out pet rock with relatively little growth potential compared to other cryptoassets.

Meanwhile, ETH was at the centre of a rapidly expanding ecosystem and was touted as 'the future of finance'. And though there were other platform plays like Solana with even more growth potential, only Ethereum came close to matching Bitcoin's longevity and dependability. From a risk/reward standpoint, ETH was a clear best.

For once, Ethereum's usually conflicting narratives seemed to synergise to make it the perfect play for anyone bullish on crypto.

You knew it wouldn't let you down or run into fundamental problems, but it was still exciting and rewarding.

At the time, this was great for ETH -- and it probably contributed to its outperformance in the bear. But fast forward to today and it's become a problem.

Almost everyone who has been involved in crypto for more than one cycle already has ETH exposure. And, if they don't already own ETH, it's likely because they have a clear reason not to -- usually because of irreconcilable philosophical differences.

Put another way, most people in crypto either already own ETH or never will.

As the bull run began, the people who already held ETH weren't given a reason to buy more. Why would they prioritise an asset they already held when so many under-owned assets looked so attractive?

If anything, existing holders were likely to sell some of the ETH they owned for assets with more short-term promise, resulting in even worse price action.

With little support from crypto-natives, ETH needed crypto-tourists and newcomers to step in. But the market wasn't flooded with new capital as many expected. In fact, we're still waiting for general interest in crypto to pick up and for the next cohort of users and investors to arrive.

Without them, it's understandable that ETH would struggle with a lack of buyers.

To start performing better, ETH needs to give existing holders a reason to increase their allocation or find brand-new buyers entirely... Hold onto that thought, we'll come back to this in a bit.

Dilution Across Assets

Making matters worse, the few dollars that did enter Ethereum's atmosphere were scattered across multiple assets.

This is because there are now a plethora of Ethereum-aligned assets that could be viewed as 'ETH beta' -- alternatives that should outperform ETH itself in a bullish environment.

Therefore, anyone who is bullish on Ethereum must decide the best and most profitable way to express that view.

For instance, an investor could opt for Layer 2 tokens like OP and ARB. Or they might consider staking-related tokens like LDO. Or potentially tokens from Ethereum's DeFi, NFT, or RWA ecosystems, like UNI, BLUR, or ONDO. Perhaps they'd even like Ethereum-based memecoins such as PEPE or MOG.

There are so many different avenues to go down, and so many different assets to consider if you're bullish on ETH.

Even if you want to keep things simple and just own ETH, there's still a decision to be made about whether it's better to own native ETH, liquid-staked ETH, or liquid re-staked ETH.

All of this creates decision fatigue, which could put some investors off.

Worse, it causes any incoming funds to be diluted across a variety of assets, reducing the stimulative effect that cash could have.

ETH isn't entirely alone in suffering from this. After all, an investor might have to consider the pros and cons of buying SOL over BONK or WIF or PYTH. But the ecosystem around Ethereum is much more developed with many more options, and so the dilutive effect is much more significant. And that certainly didn't help when Ethereum was already on the back foot.

Security Concerns

Adding to all of this was the concern that ETH would be declared a security by the SEC.

I'm sure you've seen the rumblings about investigations into the Ethereum Foundation and concerns about PoS making ETH a security. Those fears would certainly have weighed on ETH and hampered its performance.

It was going against years of conventional wisdom that said ETH was a commodity and therefore safe from the SEC's attacks. Now markets had to consider and price in worst-case scenarios like Ether being delisted from major exchanges.

Plus, it threatened to undermine Ethereum's appeal to institutional investors. After all, they probably wouldn't want to buy into something with so much uncertainty around it. And that's if they could access it at all without an ETF wrapper.

See, once the Bitcoin ETF was approved, people automatically assumed an ETH ETF would follow. It may have taken another lawsuit to force the SEC's hand, and so it could have taken a year or more to become reality, but it looked pretty certain. That gave ETH a tiny glimmer of light at the end of a very long tunnel.

But the security concerns dashed those hopes almost entirely. Ethereum's gloomy and pessimistic atmosphere grew ever darker.

It felt like Gary Gensler and the SEC were kicking something that was already down.

Marketing Problems

The final thing I wanted to mention was the difficulty Ethereans seem to be having in campaigning on Ethereum's behalf.

There are two prongs to this.

First, a lot of Ethereans have migrated from Twitter to Farcaster over the past year or so. Even if they haven't transitioned fully, they're spending much less time on Twitter.

And yet Twitter remains the focal point of most crypto culture.

With fewer Ethereans about to argue their case and get the message across, we end up experiencing a slightly warped version of reality that is shaped and dominated by Ethereum's detractors.

The negatives are presented much more frequently than the positives, which both contributes to and exaggerates the sense of pessimism around Ethereum.

The second is about Ethereum's research-heavy mentality that some find off-putting.

When Ethereans are see discussing things on Twitter elsewhere on social media, their conversations are often un-relatable and jargon-heavy. It leaves potential users feeling alienated and maybe even annoyed.

For instance, users might understandably complain about relatable problems, such as high transaction fees that make small trades impossible. But then see prominent Ethereans throw around incomprehensible and slightly ridiculous terms like 'Proto-Danksharding'. It makes them feel like their problems aren't being taken seriously.

Now, I don't want to be too critical here. Ethereum -- and blockchains in general -- are pretty complicated and involve lots of difficult tradeoffs that the average user won't appreciate.

But equally, Ethereans will never win the narrative war if they continue as they are. As difficult as it may be, they need to find a better way of acknowledging the complaints of average users, whilst also explaining in simple terms why certain design decisions have been made and what is being done to help.

To be honest, that may not be possible. Most people don't want to understand why things are the way they are, or they don't have time to learn it. Instead, they'll just assume Ethereum is clunky and expensive because it uses old and outdated technology. And they'll assume prominent Ethereans simply don't care because they are rich and out of touch with normal people.

In the long term, this probably isn't a big issue. Eventually, if Ethereum's thesis is correct, people will be using low-fee L2s without a care in the world. They probably won't even know they are using an L2, let alone an L2 within the Ethereum ecosystem.

But, until all the difficulties have been abstracted away, users will notice Ethereum's shortcomings, and they will complain about them. And those complaints will continue to contribute to the negative atmosphere around Ethereum and continue to make Ethereans look out of touch. Unless Ethereans can streamline their messaging enough to break through the noise and explain their approach in a clear, understandable, and understanding way.

Will The ETF Change Things?

Together, all of those factors have contributed to ETH's underperformance and Ethereum's gloomy atmosphere over the past few months.

So, the question now becomes, can the ETF help to change this?

I think it will. Or, at least it should, as long as broader circumstances and macro trends don't get in the way and derail things.

That's because the ETF approval will address many of the reasons for Ethereum's underperformance.

Security Concerns Cleared

First of all, the ETF approval clears away most of the concerns and uncertainty about Ethereum being declared a security.

There's still a chance that the SEC will take some action against staked ETH, but the implications of that wouldn't be as severe as declaring ETH itself a security. Therefore, the financial downside is much smaller.

And, besides, even that threat looks relatively unlikely now too.

The ETF approval appears to be a political move from the Democrats as they try to position themselves ahead of the election.

If they are genuinely looking to court crypto voters -- or at least, not scare them off -- then it would be silly to pursue aggressive actions like attacking the second largest cryptoasset.

As a result, Ethereum is suddenly unburdened and a major argument for avoiding ETH has been invalidated.

Brings New Buyers

The ETF will also help solve Ethereum's lack of buyers.

Not only will it open Ethereum up to an entirely new and incredibly wealthy pool of institutional investors, but it gives crypto-natives a reason to start buying ETH again.

Many crypto-natives will have been caught offside by the ETF approval. They will have sold ETH for more exciting and better-performing assets earlier in the bull run. But now they are underexposed and will want to correct that.

At the same time, traders and short-term investors may flood back to ETH as they try to front-run and price in the ETF launch.

Then, once the ETFs are live, TradFi dollars will dominate the price action.

I don't expect these funds to perform as well as the Bitcoin ETFs, but I think their performance and impact on ETH's price should be relatively similar when you scale by the market caps.

And, over the long term, the ETFs open the door for vast quantities of wealth to flow into ETH and the Ethereum ecosystem.

In short, the ETFs should attract new buyers and new dollars to Ethereum over both short and long time frames. And that's exactly what ETH needs to start moving again.

Resets The Narrative

We've already seen how price action and narratives are tightly coupled.

If the ETF excitement and front-running do cause ETH to outperform other assets in the short term, it could be enough to get the narrative flywheel running.

At the very least, a period of positive price action would reduce concerns about competitors like Solana and Bitcoin encroaching on Ethereum's territory. It's silly that price action could shape opinions that much, but it is what tends to happen.

But the biggest narrative benefit of the ETF approval is that it reminds people how special and distinct Ethereum is compared to every other 'altcoin'.

At the end of the day, only two cryptoassets are considered dependable and respectable enough to have ETFs anytime in the near future. This tells us that, alongside Bitcoin, Ether is the only institution-friendly cryptoasset.

And, unlike Bitcoin, which continues to be pitched as digital gold, Ethereum is synonymous with tech crypto. Therefore, anyone in the TradFi world who wants exposure to the most dynamic and high-potential segment of the crypto industry will have to buy ETH.

Again, we're seeing that blend of time-tested dependability and excitement -- the same blend that previously made ETH the default asset for crypto-natives. Safe enough to invest in, but still capable of providing massive returns.

With the right marketing, Ethereum could even become a more popular bet than Bitcoin among traditional investors.

Bitcoin has a massive head start and much better brand recognition than Ethereum, but it also has a less interesting story.

Most people don't particularly care about gold, so they may not care about digital gold either. But a lot of people like tech plays that are growing fast and generating real returns -- which sounds a bit more like Ethereum.

Still, TradFi types will already consider Bitcoin to be an exotic asset with lots of risk and lots of potential, so perhaps they won't want to push much further down the risk curve -- even if the returns could be slightly higher.

Therefore, I think the chance of ETH becoming the default asset again is relatively low -- at least in the near term. But, with enough time and clear messaging, it's far from inconceivable.

Even if that never happens, the ETF launch will be a huge moment -- almost a reset point -- for Ethereum and its narratives.

At the very least, this gives Ethereum a point of differentiation from other smart contract platforms and provides some breathing space after Solana's relentless onslaught. It should help ETH to rise alongside Bitcoin and Solana, rather than being eaten up by them. And, after a lengthy period of losing ground to the competition, I think a lot of Ethereans would consider that a win.

Professional Marketing

The ETFs may even help Ethereum's messaging problems.

Once the ETFs launch, it will be on the ETF issuers to market their products to potential customers. And that means they will need to start explaining what Ethereum is in simple terms -- without technical jargon and silly terminology.

While it may come a bit too late for cryptonatives, it should mean TradFi types have a slightly better introduction to Ethereum. And, who knows, maybe some Ethereans will absorb some of the marketing terms and improve their own promotional efforts as well.

Reduces Dilution

The ETFs should also help with the dilution problem.

Of course, crypto-natives will continue to distribute funds across a range of Ethereum-aligned assets in the hope of finding the greatest returns.

However, the ETFs themselves will be constrained to vanilla ETH. All of the flows will go to Ether alone. And, depending on how successful the launch is, it could be a lot of money funnelling into one asset -- which could counteract the dilution among crypto-natives.

But Are There Risks?

From all this, we can see that the ETFs will address virtually every problem that has contributed to Ethereum's underperformance and negative outlook.

Some of the fixes may take time to play out -- especially things like marketing changes and the introduction of new, institutional investors -- but we should start to feel the benefits over the next 12 or 18 months.

And, if that happens, then it's very reasonable to think the ETFs will wake ETH from its slumber, boost prices, and bring an altogether more positive attitude to the space.

But, of course, nothing is guaranteed.

There are many ways that this could go wrong and Ethereum could continue to flounder.

Today, people are predisposed to believe anything negative about Ethereum. That's simply what happens when bad vibes linger this long. And so it will be at particular risk of any downside surprise or even stagnant price action when these funds launch. After all, that would confirm everyone's existing bias that ETH's time has passed and Ethereum is dying.

In a worst-case scenario, that downbeat attitude could even leak from crypto-Twitter into the wider world and contribute to weaker demand for ETFs. I don't necessarily expect that to happen, but people aren't always rational and sentiment can play a big role in investment decisions -- even for the supposed 'smart money'.

The obvious short-term risks are ETF inflows being much smaller than expected or Grayscale outflows being larger than expected. Either way, ETH would probably suffer quite significantly.

Longer-term, the big issue would be Ethereum failing to establish itself as an interesting or worthwhile investment for TradFi. They seem to have a degree of interest in Bitcoin, and so we're all assuming they'll like Ether as well, but we don't really know that yet. There certainly isn't the same clamour for ETH ETFs as there was for Bitcoin ETFs -- though that's to be expected. But if Ethereum can't catch on or generate any excitement once ETH is on the main stage and the marketing materials are out, then it could be in trouble.

Does Any Of This Really Matter?

The final point that's worth thinking about is 'does any of this matter?'

So what if ETH's price doesn't do so well?

Ethereum works the same regardless of ETH's price. It could be worth $10 or $10,000 and the network would function in the same way -- albeit with a different level of security.

Plus, this is all very focused on the short-term, and Ethereum is all about building sustainably with the long game in mind.

Price action, vibes, and narratives are largely noise. They don't make a huge difference in the day-to-day running of Ethereum.

However, I probably wouldn't be writing this if that was all I thought. After all, I tend not to focus on short-term price action here.

The reason I think this stuff is important is because the narrative and vibes around protocols like Ethereum will play a role in its future success. What seems like irrelevant noise today can, eventually, become a pattern and set a trend.

Nobody will want to build on a chain that is perceived to be dying. Nobody would want to use that chain either -- especially if fewer builders appear to create exciting new opportunities.

It won't happen overnight, but if Ethereum cannot start to perform a bit better -- if it cannot change its narrative and start to gain some momentum -- then it will leak more and more activity to competitors.

Its powerful network effects, which some might consider almost insurmountable today, would be slowly eroded.

The threat isn't immediate, and the risk is relatively low -- for now.

Contrary to popular perception, Ethereum continues to lead the competition in virtually every meaningful metric. The very fact that ETH is the lone altcoin to have an ETF shows just how far ahead of the competition it is in some regards. Platforms like Solana are likely years away from similar mainstream financial products.

But Ethereum cannot be complacent. It must not squander its lead. Not while the crypto industry is so new and set to grow so dramatically in the years to come. Things can -- and likely will -- change much faster than many anticipate.

Ethereum's head start, network effects, and long-term philosophy mean it has a great chance at being the dominant crypto platform for the foreseeable future.

But its success is certainly not guaranteed. And, whatever it does, Ethereum cannot afford to let the bad vibes linger much longer. The upcoming ETF launch may be the best opportunity to dispel them once and for all.

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Disclaimer: Anything expressed here is my own opinion stated for informational and educational purposes; nothing I say should be taken as investment or financial advice. Many projects mentioned on this channel are highly experimental and therefore come with risks. Please evaluate your own risk tolerance before experimenting with these projects, and remember that investing in cryptoassets is extremely high risk and could result in total loss of capital.

I may own some of the cryptoassets mentioned.

Sometimes, you'll come across cryptoassets that look ridiculously cheap, costing just a tiny fraction of a penny per token. So cheap that you could pick up millions of them for a relatively small, relatively affordable sum of money. Compare that to the likes of Bitcoin and Ether, where a single token would set you back many thousands of dollars.

The affordability of these tokens, combined with the apparent potential for massive financial gains, makes these ultra-cheap tokens particularly attractive.

The thinking often goes something like this. $100 today would buy -- let's say -- 100 million tokens. Then, if the price went up to even $0.01, they'd be worth $1 million. So it's a relatively small risk with a potentially life-changing reward.

And the best part is, those sorts of gains don't seem totally unreasonable. After all, similar things have happened many times in crypto's history. People used to buy Bitcoin for pennies and now it's worth more than $60,000. Compared to that, a new token going to one cent is almost reasonable.

But here's the thing. You almost certainly won't make extraordinary gains on these ultra-cheap tokens. And that's largely because these tokens often aren't cheap at all. Their enticing low prices don't tell the whole story.

In fact, an asset's price on its own will never provide enough information to make a truly informed valuation or investment decision.

This is an incredibly important concept to understand if you plan on putting any money into crypto. Knowing this could stop you from being misled, making bad decisions, and ultimately losing money.

In this video, I'll explain why this is and show you a better way of evaluating and comparing cryptoassets so that you can make better and more informed decisions.

Disclaimer

Before we get to that, I need to make it really clear that none of what I say should be taken as a suggestion or recommendation to buy or sell any specific asset or crypto in general. If I use something as an example here, it really is just an example -- not some kind of covert suggestion to buy or sell.

What you do with your money is entirely up to you. All I want to do is give you some crucial information to help you avoid a common mistake that many newcomers to these markets make.

Knowing this stuff won't stop you from losing money -- crypto is very risky and you can always lose what put in -- but it will certainly reduce your chance of failure and increase your chance of success. And that's about the best you can ask for.

So, with that warning out of the way, let's get into it.

The Price Isn't Right

When I described the usual thought process that goes into buying ultra-cheap tokens, I primarily focused on the price and affordability of those tokens. But, as I mentioned earlier, price on its own tells us very little.

It's not possible to look at a token's price -- even if it has many leading zeros -- and say "That's cheap".

This is because it misses another very important factor: the supply -- or the number of tokens.

Introducing Supply

For every asset, there is some number of identical or near-identical units that could -- at least theoretically -- be bought or sold at any moment. We call this number the circulating supply. Often, it's shorted to just 'the supply'.

For cryptoassets, the circulating supply only includes tokens that have been officially released while ignoring tokens that have been officially destroyed or 'burned'.

A token's supply can change over time.

Whenever tokens are created or unlocked -- usually to pay validators, team members, or early investors -- the circulating supply will increase. And whenever tokens are sent to a burn address, the circulating supply will decrease.

Every cryptoasset follows its own rules governing the creation, release, and destruction of tokens. Therefore, every cryptoasset will have a different circulating supply. And the difference in supply between different cryptoassets can be enormous.

Bitcoin, for example, has a circulating supply of just under 20 million tokens today. Meanwhile, Shiba Inu (SHIB) has a circulating supply of about 589 trillion tokens.

These differences in supply will inevitably result in different prices for different assets, even if they were identical in every other way.

Think of it like this.

Imagine two cakes, identical in every way other than the number of pieces they are cut into.

One cake is cut into 100 tiny slivers, the other into 8 generous slices.

Given the choice, would you pay the same price for a single slice of each cake? No, you would want to pay less for the smaller slice. It doesn't matter that it's still '1 piece' of cake, it is a relatively smaller portion and the price should reflect that.

It's a silly example, but it helps to demonstrate the relationship between price and supply. As the number of tokens increases -- or as the circulating supply increases -- the price of each token should decrease.

The Problem With Price

This presents a problem when it comes to evaluating assets.

If a token's price is affected by its supply, how can we know when a token is genuinely cheap and when it just appears cheap because its supply is very high?

Furthermore, how can we compare the value of two assets with different supplies? Cryptoassets tend to only be 'cheap' in relation to one another, so it's essential that we can evaluate them in a fair and equal manner.

Price simply isn't good enough.

To make truly informed investment decisions, we need a new valuation metric that accounts for potential differences in supply. We need something called market capitalisation, or market cap.

Introducing Market Cap

The market cap is calculated by multiplying the price of a single token by the number of tokens in circulation, thereby neutralising the effect of the circulating supply.

You can think of market cap as the hypothetical cost of purchasing every circulating token at the current market price. This gives us an indication of how the market currently values an asset as a whole.

Market Cap, It's A Piece Of Cake

In our cake example, this would be like looking at the price of each entire cake rather than the price of individual pieces from each cake. Therefore, it no longer matters if one cake has been cut into many more slices than the other.

Previously, we imagined the cakes were identical except for the number of slices they were cut into. Let's now say they are also different flavours, and we want to decide which one is a better buy. This is kind of like comparing two cryptoassets to decide which to invest in.

Let's say the 100-slice cake is a Victoria sponge, and each slice costs $0.25. The 8-slice cake is a chocolate cake, with each slice costing $2.5.

Which of these is a better deal?

At a glance, the Victoria sponge may seem cheaper.

After all, $2.50 will buy you just one slice of chocolate cake but 10 slices of Victoria sponge. That seems like a lot of cake for the money, so it must be a good deal.

But wait. Let's check the market cap of each cake.

For the Victoria sponge, it's $0.25 x 100 = $25.

For the chocolate cake, it's $2.5 x 8 = $20.

So, while it may look more expensive at a glance, and while you may get fewer slices for the same amount of money, the chocolate cake is actually cheaper.

In fact, it's substantially cheaper, costing 20% less than the Victoria sponge -- something you would never realise if you focused on the price alone.

Now that we have this standardised, fair valuation of each cake, we can make better decisions about which cake we want to buy -- if indeed we want to buy either.

For example, I would say that the chocolate cake is not just a cheaper cake but a better, more desirable cake. So, for me, it seems like a much better deal than the Victoria sponge.

If I had focused only on the price of an individual slice and bought what I initially believed to be the cheapest option, I'd have bought a less desirable cake at a worse price.

Of course, others will interpret those market caps differently and have different opinions.

Someone who dislikes chocolate cake and loves Victoria sponge cake might think the price difference is more than justified. For them, the chocolate cake may seem overpriced even though it's cheaper, while the Victoria sponge might be a bargain at twice the price.

Equally, someone could prefer Victoria Sponge cake but find it difficult to justify buying at the higher price. For them, the chocolate cake may still be a more attractive option despite generally preferring the alternative.

And yet another person might argue that both cakes are overpriced because they've seen a $10 coffee cake.

At the end of the day, everyone will have their own opinion about which cake is better, how much they think it's worth, and at what point it stops being a worthwhile purchase.

Relying on the market cap won't change those opinions, and it won't provide a magical truth to guarantee the right decision is made every time.

What it will do, however, is provide a strong foundation for everyone to make their decisions. It provides a standardised, fair valuation for every asset, cutting through the noise and preventing anyone from being misled by differing supplies and deceptive prices.

Why One Cent Is (Market) Cap

Now that we're thinking in terms of market cap, you may be able to see why tokens with incredibly high supplies are unlikely to reach prices of even a few pennies.

If they did that, then the market cap -- the valuation of the asset as a whole -- would be ludicrously high. People love to talk about their token going 'to the moon', and in these cases, the market caps would be truly astronomical, reaching levels that almost no one could justify.

Again, we can return to our cake example to get a sense of this.

A cake salesman with a poor understanding of market cap might think he could charge the same price for a slice of each cake, despite one being cut into many more pieces than the other.

Now, both the Victoria sponge cake and the chocolate cake cost $2.5 per slice.

Let's see what that does to the market caps.

The chocolate cake is still $2.5 x 8 = $20.

For the Victoria sponge, it's now $2.5 x 100 = $250

That's an absolutely insane price for a cake!

The number of people willing to buy a $250 cake would be very small. You'd either need to love Victoria sponge cake, or not understand market cap enough to know what you were buying.

Bringing It Back To Crypto

An example from the world of crypto might also be useful here.

Earlier, I said that SHIB had a circulating supply of 589 trillion tokens.

Today, each of those tokens is worth a few thousandths of a penny -- which looks pretty cheap.

Occasionally, people on social media might suggest that SHIB could go to $0.01 per token. For a newcomer to these markets, that doesn't sound crazy.

They might even think it could reach $0.10 or $0.20 because Dogecoin has reached those prices and it's a broadly similar asset.

However, these prices look unlikely when we consider the market cap.

At a price of just $0.01 per token, SHIB's market cap would be nearly $6 trillion. At $0.10, SHIB would be worth almost $60 trillion.

For context, the combined market cap of every cryptoasset today is about $2.5 trillion. Microsoft, meanwhile, is the world's most valuable company with a market cap of about $3 trillion.

That makes $5 trillion an exceptionally -- and perhaps impossibly -- large valuation for a memecoin.

I don't think SHIB will ever trade close to $0.01. And, if it does, it's probably because something truly crazy has taken place.

Therefore -- and, again, this is purely my opinion -- I wouldn't be buying SHIB with the expectation of life-changing returns from a tiny outlay.

The problem, as I mentioned right at the start, is that SHIB is more expensive than it first appears.

Yes, individual tokens cost very little. But its market cap is already around $15 billion, which I find difficult to describe as "cheap".

Perhaps it's cheap in historical terms, given its all-time high valued SHIB at over $40 billion. Or it could be cheap relative to the largest memecoin DOGE, which is currently worth about $22 billion. But is it cheap outright? Is it as cheap as its ultra-low token price suggests? Probably not.

Check Yourself Before You Wreck Yourself

Now, I'm not trying to pick on SHIB in particular. It just happens to be a good and relatively popular example of a high-supply token. But there are loads of similar assets out there.

These days, cryptoassets are often designed with intentionally high supplies. The teams behind these tokens know that most people prefer to own one million cheap tokens instead of one-millionth of an expensive token.

And people on social media tend to shill these high-supply tokens, often using the kind of argument I outlined earlier, where small investments could become vast if the price increases to a seemingly modest new value.

Wha tever the asset is, wherever you've heard about it -- and especially if the potential gains seem too good to be true -- it's a good idea to check the market cap before you buy.

It will stop you from buying something that is much more expensive than you first realised. And, if you still choose to invest, it will stop you from getting attached to fantasy price targets that are almost impossible to hit -- something that has led many to roundtrip their gains.

Where To Check Market Cap

So we've covered why you should look at market cap instead of price, but we haven't yet seen how to do it or where you can get that information.

There are plenty of tools out there that make checking market caps incredibly easy. CoinGecko is probably the most popular, but alternatives include CoinMarketCap and Messari. And for brand-new assets that aren't listed elsewhere, you can try a site like DEX Screener.

All of these sites will show you an asset's price, supply, market cap, and much more.

Using these tools, you can check on the market cap of the assets you are interested in, as well as the current and historic market caps of other, similar assets.

This will give you a sense of how the market values different types of cryptoassets, which will help you set realistic price targets. It will also help you decide if something is cheap and attractive, with plenty of room to run, or offputtingly expensive.

A Twist In The Tail

When using these sites, you might notice that they often include both a 'market cap' and a 'fully diluted market cap' -- and you might wonder why that is.

Remember how a cryptoasset's circulating supply can change over time, increasing as new tokens are issued or released?

The fully diluted market cap looks ahead, showing what the market cap would be if all those unreleased tokens were already in circulation. So it's the market cap using the maximum possible supply -- or total supply -- rather than the circulating supply.

This really deserves a video of its own, but I wanted to mention it here because it's increasingly common for cryptoassets to launch with a small fraction of their supply in circulation. That means the market cap can appear quite reasonable, while the fully diluted market cap is extremely expensive.

A good example of this is Worldcoin (WLD), which has only released about 2% of its total supply. While its market cap is about $1 billion, its fully diluted market cap is closer to $50 billion.

So this is another example of how a cryptoasset's supply can mislead investors into buying something more expensive than it first appears.

To avoid falling into this trap, it's worth checking both the market cap and the fully diluted market cap. If there is a very significant difference, then you'll need to think about which valuation is more realistic. After all, those different market caps will eventually converge as the unreleased tokens hit the market.

You must decide if the fully diluted market cap can be sustained, or if the token price will fall to accommodate that additional supply.

And the longer you plan to hold an asset, the more important these considerations are likely to be. After all, that's more time in which new tokens could enter circulation and -- potentially -- devalue your holdings.

Summary

We've covered a lot, so let's sum it all up.

Prices can be misleading. Tokens can look incredibly cheap simply because they have a high supply.

So, instead of looking at an asset's price, we should look at its market cap.

The market cap is calculated by multiplying the token's price by its circulating supply, providing a standardised valuation for assets as a whole.

With this measure, we can compare assets in a like-for-like way, without supply differences interfering.

This will help us determine if something is cheap or expensive, and create more realistic price targets that won't result in sky-high valuations.

You can use tools like CoinGecko to check the market cap of assets you are interested in.

While you're there, it can also be useful to check on the fully diluted market cap.

This shows what the market cap would be if every token was already in circulation.

Sometimes, you'll find that the fully diluted market cap is many multiples higher than the market cap. In these cases, you might need to think a bit more about which of those valuations seems more appropriate -- especially if you plan to hold for a long time.

But remember, while knowing this can stop you from making common rookie mistakes, it won't guarantee you success.

When you choose to invest in crypto, you are putting your money at risk and you could easily lose it all. For that reason, you need to think carefully about if you want to invest, and how much you can afford to lose if you choose to.

With that I will say good luck out there, thank you very much for watching, and I'll see you in the next video.

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• 📚 Mirror: https://mirror.xyz/topiccrypto.eth

Disclaimer: Anything expressed here is my own opinion stated for informational and educational purposes; nothing I say should be taken as investment or financial advice. Many projects mentioned on this channel are highly experimental and therefore come with risks. Please evaluate your own risk tolerance before experimenting with these projects, and remember that investing in cryptoassets is extremely high risk and could result in total loss of capital.

I may own some of the cryptoassets mentioned.

Ethereum’s next major update is on its way.

EIP-4844, better known as Proto-Danksharding, is intended to make Ethereum a better home for Layer 2 (L2) platforms and ultimately improve the scalability of the whole system, reducing fees for end-users. It does this by introducing a large quantity of short-term data storage to Ethereum, which will make it much cheaper for L2s to post data to the platform.

Of course, this likely doesn’t mean much to most people. So, to properly understand what Proto-Danksharding is and why it matters, we first need to understand a bit of background information. And, it all starts with Ethereum’s poor performance.

Ethereum Sucks!

If you paid any attention to crypto in the last bull run, then you probably heard a lot of people saying the same thing: "Ethereum sucks!" That's because, during times of high demand, Ethereum transactions are both slow and expensive -- especially when compared to competitors like Solana.

You might assume this is because Ethereum is older than the cheaper blockchains and therefore has worse, outdated technology. However, that's not the case. In reality, Ethereum's poor performance and high fees are entirely intentional.

You might think that's crazy. After all, why would anyone choose to provide a terrible user experience? Well, it's because Ethereum is simply prioritising something else: decentralisation.

There's a lot that could be said here, but I'm going to save most of it for another time.

What you need to know is that Ethereum is designed to minimise the barrier to entry for anyone wanting an active role in the network. This ‘decentralises’ Ethereum by enabling a vast army of ordinary individuals to contribute to the network’s day-to-day operations, rather than limiting that ability to those with the wealth and resources necessary to run powerful hardware. In practice, it means Ethereum’s software must be able to run on all sorts of computers -- including fairly cheap, low-powered ones. And that places a severe limitation on the platform. Ethereum blocks cannot contain a large quantity of transactions or data because that would overwhelm the low-end computers in the network.

As a result, it doesn't take a significant increase in transaction volume to saturate Ethereum's blocks. When that happens, users are forced to outbid one another to ensure their transaction is prioritised and included in a block. And that very quickly spirals into the sky-high transaction fees we all love to complain about.

Of course, Ethereans recognise the problem here. They certainly don't want to create a system that anyone can help run but only the rich can afford to use. And so they've come up with a plan. One that will allow them to retain the accessible, decentralised core of the system while also increasing capacity and reducing transaction fees for end users. And that plan is Layered Scaling.

Layered Scaling

Layered scaling is ultimately about aggregating as much activity as possible into a small number of Ethereum transactions.

The idea is to shift most day-to-day transactions away from Ethereum and onto new Layer Two (L2) platforms. These platforms are built with performance in mind, ensuring transaction fees remain low even when demand is high.

What differentiates L2s from other high-performance blockchains is that they anchor themselves into Ethereum to inherit its security. Every so often, all of the recent L2 transactions will be batched, compressed, and represented in a single transaction on the Ethereum blockchain. In this way, all the activity still takes place on the Ethereum blockchain, albeit less directly. But, it’s still enough to ensure every L2 transaction is ultimately verified and secured by Ethereum.

That leads to the ultimate win-win scenario for end users. They still enjoy all the benefits of Ethereum and its robust, decentralised design but they don't suffer with its low throughput, slow transactions, and exorbitant fees.

The Problem

Years of research have convinced Ethereans that this layered approach is the best way to build and scale a blockchain. The problem is, Ethereum wasn't built with this methodology in mind. So, some modifications are required to get the most out of this more modular design.

One of the biggest issues is storing data.

Remember how Layer Twos aggregate all their recent transactions and represent them in a single Ethereum transaction. Well, that Ethereum transaction must contain a fair amount of data -- essentially a summary of all the L2's recent activity.

And, here's the problem, Ethereum only has one kind of data storage: permanent. When an L2 posts a bunch of data to Ethereum, everyone in the Ethereum network must hold onto that data forever. That's not easy to do, and it places a significant burden on the computers in the network. That isn’t good for Ethereum, especially because its priority has always been minimising the burden on those computers to keep the network decentralised.

The situation is also not good for the L2s. Ethereum doesn't want people filling blocks with data and overwhelming the low-end computers in the network, so it charges a high price for data storage. As a result, L2s must pay a lot of money to make their settlement transaction on Ethereum, and the L2's users must pay higher fees to account for that. Again, this is particularly silly when the whole point of the L2s is to provide a low-fee environment.

So, we need a better solution for storing data. And, this is where Proto-Danksharding comes in.

Proto-Danksharding

Proto-Danksharding (officially named EIP-4844) will introduce a new type of transaction to Ethereum, and these transactions will unlock a new kind of short-term storage.

The new transactions are called blob-carrying transactions.

Believe it or not, blob is a technical term. It's short for Binary Large Object, which refers to an arbitrarily large chunk of data. So, when we say 'blob-carrying transaction', we just mean a transaction that is associated and travelling with some arbitrary piece of data. Data that might, for example, summarise a whole bunch of L2 transactions.

But, the word ‘blob’ is also quite appropriate here. I find it useful to think of these data chunks as literal sticky blobs that can cling to an Ethereum block like a barnacle on a boat. And, just as barnacles are scraped off of boats before they cause problems, these blobs will be scraped off of blocks and discarded before they overwhelm the network.

This is the big improvement that Proto-Danksharding will bring: short-term storage.

Any data contained in a blob will only be stored on Ethereum for a few weeks. After that, everyone in the Ethereum network is free to delete and forget about that data forever, reducing the burden on all those devices.

It's safe to do this because that information doesn't need to be stored for eternity. At least, not by all parties. The important thing is that the L2 data is distributed and made available to anyone who might need it. Sticking it onto the outside of an Ethereum block and distributing it across an un-censorable global network is a pretty good way to ensure all interested parties have access. After a few weeks, those parties should have had plenty of time to make permanent copies or to do whatever they need to do with that data.

Blob-carrying transactions are a big win for Ethereum. The short-term storage minimises the strain placed on the Ethereum network and doesn't threaten its decentralisation in the way permanent storage might.

It's also good for the L2s. Because short-term storage is less burdensome than permanent storage, a greater quantity can be offered at a much lower price. Therefore, Layer Twos won't need to pay anywhere near the costs they currently pay to settle on Ethereum, and they can pass those savings on to end users.

Conclusion

By introducing short-term data storage, Proto-Danksharding puts right the contradictions of Ethereum’s current scalability solution.

Ethereum will no longer face the burden of permanent data storage, and L2s won’t pay through the nose to access that storage. Meanwhile, end-users will pay lower fees on platforms that are even more competitive with high-throughput, low-fee blockchains like Solana.

Overall, then, Proto-Danksharding and blob-carrying transactions represent a massive step forward for Ethereum and its layered scaling ambitions.

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Ethereum is about to get a big update, and it's called Dencun. Or Deneb. Or Cancun. Or Proto-Danksharding...

Yeah, Ethereum tends to have pretty bad and pretty confusing marketing. Things usually make sense once you dig into the details, but it's a nightmare for anyone who isn't a hardcore Etherean. It's almost as if everything has been deliberately designed to bamboozle -- including things as simple as naming an update.

So, how did we get here? Why do Ethereum's updates seem to have so many different names?

Two Layers, Two Names

As you might expect of Ethereum, most of the naming confusion comes from something that is -- potentially -- even more confusing.

Ethereum is actually made up of two separate layers: the Execution Layer and the Consensus Layer. Therefore, each Ethereum update is actually a pair of updates, one for each layer. And each of those updates gets its own name and follows its own naming convention.

Why Two Layers?

Ethereum's unusual, layered design comes from its transition from Proof of Work (PoW) to Proof of Stake (PoS).

Without going into too much detail, PoW and PoS are just different ways of deciding how a blockchain should be updated with a new batch of transactions.

Ethereum started life as a PoW chain but felt that PoS was a better fit that would help it achieve its long-term ambitions. So, years after it first launched, Ethereum took the unprecedented step of transitioning from PoW to PoS.

The developers decided that the simplest and safest way to accomplish the transition was to build an entirely separate blockchain that just did PoS. This new chain ran in parallel to the existing Ethereum blockchain and, for a long time, there was very little interaction between them.

Then, when everything was ready, the two chains were merged. PoW stopped on the existing Ethereum chain, and the new PoS chain effectively 'absorbed' the old blockchain and became responsible for updating it.

In this way, Ethereum became a single entity operating under PoS. But, if you look closely, you'll see that there is still a small separation between the two elements. Where it was once two separate blockchains, it is now two separate layers.

Today, the old Ethereum blockchain is known as the 'Execution Layer'. This is where most of the activity happens. It's where smart contracts live and transactions take place. Meanwhile, the PoS chain is known as the 'Consensus Layer', and it pretty much only does PoS to decide which block comes next.

(If you want to learn more about the shift to PoS, check out my in-depth explanation here)

What's In A Name?

As mentioned earlier, updating Ethereum means updating both the Execution Layer and the Consensus Layer. Each of those updates has a different name and follows a different naming convention.

Execution Layer Updates

Execution Layer updates are named after cities that hosted an Ethereum conference called DevCon.

The Ethereum Foundation's Alex Beregszaszi suggested this naming pattern in mid-2019, first on the Ethereum Magicians forum and then in an All Core Devs call. He argued it would provide an almost endless list of names while eliminating any potential debates or squabbles about how things should be named.

DevCon has been held all over the world and its location changes each year. Previous host cities include Berlin, Osaka, and Bogotá. The next one (at the time of writing) will be held in Bangkok.

The most recent Execution Layer upgrade was called Shanghai, which hosted DevCon 2. The next update is named Cancun after the city that hosted DevCon 3. Then we'll have Prague, as it hosted DevCon 4, and so on.

Consensus Layer Updates

Consensus Layer updates are named after stars and go in alphabetical order. So, the first update was named after a star beginning with A, the second after a star beginning with B, and so on.

I'm not sure who initially suggested the idea, but the star-based names proved popular among Consensus Layer developers and the Ethereum community.

Of course, the less proscriptive naming convention compared to the Execution Layer means a decision is still required for each update. After all, there are a lot of stars out there that could lend their name to an update.

Generally, people will discuss possible names in places like the Ethereum Magicians forum (like this or this), before a final name is decided based on rough consensus in an All Core Devs Call.

So far, updates have been named Altair, Bellatrix, and Capella. The update in March is called Deneb, after a star in the constellation of Cygnus. The next Consensus Layer update after that will be called Electra.

Combining The Names

That leaves each Ethereum update with two different names -- which might confuse people. So, to try and help the situation, Ethereans decided to "simplify" things by creating a third name that combined the other two.

It seems that the idea to create a portmanteau to refer to the overall Ethereum upgrade was first proposed by Protolambda, an Ethereum researcher now working at Optimism Labs. (He's the 'Proto' in Proto-Danksharding, by the way).

As the names could be combined in a variety of different ways, there is usually another round of discussions on forums and in the All Core Devs Calls before a decision is made about what the 'official' portmanteau should be.

This has resulted in names like Shapella, which comes from combining the Execution Layer upgrade name 'Shanghai' with the Consensus Layer upgrade name 'Capella'. Similarly, the next update Dencun is the portmanteau of Deneb from the Consensus Layer and Cancun from the Execution Layer. Then we'll have Pectra, from Prague and Electra. However, because this can be difficult to pronounce properly, some people are "simplifying" things again by using yet another name: Petra (like the city).

Other Names

So, this naming system is already getting quite complicated. But there are still more complexities to throw into the mix.

In addition to the three 'official' upgrade names -- one for each layer, plus the portmanteau of the two -- people will sometimes use other names to refer to certain updates.

For example, some people are just talking about Proto-Danksharding when they're talking about Dencun. Or, they might use terms like 'The Merge' when referring to another update. So, what's that about?

Well, it kind of comes from the scale that people are focused on.

Small Scale: EIPs

Just as every high-level Ethereum update is actually a pair of updates rolled into one, each update is also formed of several smaller changes.

These small changes are called Ethereum Improvement Proposals (EIPs). (Technically, the large-scale updates like Dencun are also EIPs, but they're a special kind called a 'Meta EIP' because they are an EIP about integrating other EIPs).

Dencun, for example, contains 9 different EIPs. Five affect the Consensus Layer, and seven affect the Execution Layer.

EIPs have their own lifecycle and governance process that we can go into another time. What matters here is that each of the Proposals has its own specific purpose, and each is assigned a number that results in a standardised name like 'EIP-1234'.

Most of the time, nobody outside of the developer community pays much attention to these proposals. But, occasionally, someone will make an Improvement Proposal that is particularly exciting to a large audience of Ethereans.

One example would be EIP-1559, which dramatically changed Ethereum's fee markets to improve both UX and monetary policy (check out my piece on EIP-1559 here). Another example is EIP-4844, which is included in Dencun. This update will introduce a new type of transient storage and will be a giant leap towards Ethereum's goal of being the best foundation for Layer Two platforms (learn more about EIP-4844 here).

In addition to gaining a mass following, some particularly exciting EIPs may be given snappier, unofficial names as people discuss and promote the change. For instance, EIP-4844 is better known as Proto-Danksharding.

These particularly exciting and much-hyped EIPs often come to overshadow everything else that is included in an update with them. In fact, some people might refer to a specific EIP when talking about an overall network update.

People didn't really talk about the 'London' upgrade, for example. No, they just talked about EIP-1559, despite London including four other EIPs. Similarly, today, people tend to talk about Proto-Danksharding rather than Dencun.

Large Scale: The Ethereum Roadmap

It's not just the individual, small-scale changes that can come to dominate and unofficially lend their name to an overall network upgrade. The stages of Ethereum's large-scale, long-term roadmap can do the same. This is where terms like 'The Merge' and 'The Verge' come from.

Ethereum's founder Vitalik Buterin created a loose roadmap for the platform and updates it annually.

This roadmap divides protocol changes into rough groups named 'The Merge', 'The Surge', 'The Scourge', 'The Verge', 'The Purge', and 'The Splurge'. Collectively, they are sometimes called 'The Urges', and Bankless recently did a lengthy episode explaining all of them.

Again, the details of these changes aren't particularly important here. What matters is that certain Ethereum updates are so significant in delivering one of the 'Urges' that they may be represented by the 'Urge' name.

For instance, the Paris network upgrade saw the merging of the two Ethereum blockchains and the transition to Proof of Stake discussed earlier. While it didn't complete the entire 'Merge' section of Vitalik's roadmap, it delivered the most significant part of it. Therefore, people generally used the name 'The Merge' instead of 'Paris' when talking about this upgrade.

The upgrade after Pectra will probably introduce Verkle Trees to Ethereum. This will be a massive step towards delivering 'The Verge', and so I expect a lot of people will use that name instead of the official one.

Summary

So, that's how Ethereum upgrades end up as a confusing mess with multiple names.

Each network upgrade is really two upgrades, one for each of Ethereum's layers. Because those layer-level upgrades each have their own name, the overall upgrade takes its name from the combination of the two.

Meanwhile, unofficial names can take hold for certain, particularly exciting changes. Sometimes, these names come from individual EIPs; low-level changes that may be just a small portion of an overall update. Other times, the name comes from Ethereum's large-scale roadmap.

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Disclaimer: Anything expressed here is my own opinion stated for informational and educational purposes; nothing I say should be taken as investment or financial advice. Many projects mentioned on this channel are highly experimental and therefore come with risks. Please evaluate your own risk tolerance before experimenting with these projects, and remember that investing in cryptoassets is extremely high risk and could result in total loss of capital.

I may own some of the cryptoassets mentioned.

Last year I wrote about Ethereum's KZG Summoning Ceremony and showed you how you could take part.

Now, Proto-Danksharding -- the update that necessitated the Ceremony -- is nearly here. It will go live on March 13th as part of a package of updates known as Dencun. And that makes it a good time to follow up on the previous video and show you how you can verify your contribution and claim POAP to record your participation in the Ceremony.

Wait, What's the KZG Summoning Ceremony?

If you don't know -- or can't remember -- what the KZG Summoning Ceremony was, then here's a quick summary. Feel free to skip ahead if you're already familiar.

The Ceremony was a process for generating a secret random number that Ethereum will use in its next major update, EIP-4844 (better known as Proto-Danksharding).

Proto-Danksharding requires a new cryptographic scheme called KZG Commitments, which are built around this secret random number. It's absolutely imperative that no one ever knows what this number is. If anyone was to know it, they could craft false Commitments and ultimately cause all sorts of chaos.

Ethereum wanted to generate this number in the most reassuring way possible. It wanted everyone to have extremely high confidence in the secrecy of the number and the integrity of the KZG Commitments it would produce. And so it created the Summoning Ceremony.

In the Ceremony, anyone was free to make a small contribution towards the secret number. All of those small contributions were combined to create a single, shared secret at the end of the process. Crucially, the only way to know that final secret would be to know every contribution that went into creating it. If a single input was unknown, then the final secret would also be unknown. In other words, the Ceremony required only a single honest participant to guarantee the secret and therefore the integrity of the Commitment scheme.

More than 140, 000 contributions were made throughout the Ceremony, so it's pretty safe to assume that at least one of those was honest. If you took part yourself, then you can be even more certain of this. Or, at least, you can be certain of it once you verify that your contribution was included. So, let's see how to do that.

How To Verify The KZG Summoning Ceremony

Just like the Ceremony itself, the verification of the Ceremony Transcript is open to everyone. So, even if you didn't participate in the event, you can reassure yourself that everything looks good by going through the validation process.

Those who did take part in the Ceremony can do two extra things. First, they can check that their submission was included in the final result. Second, if they used Sign In With Ethereum when contributing, they can claim a POAP to commemorate the event.

I'll show you how to do all of these things now. And, as with the Ceremony itself, you don't need to worry about anything difficult or dangerous here. The validation process is incredibly easy and risk-free.

Step 1: Go To The Ceremony Site

Go to ceremony.ethereum.org -- the same site that was used for the ceremony itself. Click on Verify Transcript.

Step 2: Verify The Transcript

You'll be taken to a new screen where you will be able to verify the results of the KZG Ceremony.

Initially, the Verify button will be greyed out and un-clickable. That's because the verification will happen on your device, and the Transcript needs to download for that to happen. After a short wait, the button will change colour. Once this has happened, click Verify.

The verification will now take place.

As you can see, the verification includes five separate steps. Each step involves a different set of tests and validations. Some are relatively simple. The Sanity Check, for example, just ensures the Transcript looks correct at a high level. Meanwhile, other steps are more complicated, involving some clever maths and cryptography to verify the finer details.

In all cases, you should see the status change to passed as the steps are completed.

Step 3: Check For Your Contribution

If you participated in the Ceremony, you can now confirm that your contribution was included.

Use the textbox to search for the account you contributed with. If you logged in with Github, you will need to enter your Github handle. If you used Sign In With Ethereum, you can search for your ETH address or ENS name.

If your contribution was valid, it should appear in the list. You can click on the entry to look at the details, but frankly they won't mean anything to most people.

Step 4: Claim Your POAP

If you're not familiar with POAP, it stands for 'Proof of Attendance Protocol'. They're basically digital collectables that Ethereans like to use to record attendance or participation in certain events. They generally have very little value, so I wouldn't claim one expecting to sell it for a fortune one day. No, it's really just a bit of fun and something you can hold onto as a memento.

If you want to claim it, click on Claim POAP button. (If it's still greyed out and you've searched using your ENS Name, try searching again with the full ETH Address instead).

A POAP Checkout screen will open.

Click on the I Want This POAP button.

Connect your wallet to the site and select which network you want to claim the POAP on -- either Ethereum or Arbitrum. Personally, I'd opt for Arbitrum as it should be much cheaper.

Click on the To Checkout button and then the Buy Now button.

Finally, sign the transaction with your wallet.

Congratulations, you are now the proud owner of the KZG Ceremony Contributor POAP!

Wrapping Up

That's really all there is to this. It's all very simple and takes very little time and effort, so it's worth checking out if you're at all interested. And, if you're not, you won't really miss out on much.

If you want to learn more about the KZG Ceremony or Proto-Danksharding, make sure you check out my previous post. To see reflections and statistics about the Ceremony, take a look at the Ethereum Foundation's Wrapping up the KZG Ceremony. And, for more details on what checks are involved in the Transcript verification, you can take a look at the official guidance.

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Disclaimer: Anything expressed here is my own opinion stated for informational and educational purposes; nothing I say should be taken as investment or financial advice. Many projects mentioned on this channel are highly experimental and therefore come with risks. Please evaluate your own risk tolerance before experimenting with these projects, and remember that investing in cryptoassets is extremely high risk and could result in total loss of capital.

I may own some of the cryptoassets mentioned.

After 10 years of denial, the SEC has finally given the crypto community what they wanted and approved a spot Bitcoin ETF.

This is a major milestone for the industry. It's the clearest sign yet that crypto is maturing and becoming more mainstream. And it will undoubtedly bring sizeable benefits to Bitcoin, expanding the asset's appeal and opening the door for new types of users. But could it also bring new risks? Could it even leave us wondering if we'd be better off without it?

In this piece, I'll explore the potential benefits and risks of the new ETFs.

The Positives

Improved Accessibility

One of the biggest benefits of ETFs is that they will make Bitcoin more accessible than ever before. That may sound strange; Bitcoin has been publicly available since its inception. Almost anyone has been able to sign up to an exchange like Coinbase or Binance to buy it for many years now. Before that, in the really early days, people could even mine Bitcoin at home or collect it for free from online faucets. In many ways, it's hard to get more accessible than that! However, there were limits to Bitcoin's accessibility. Various factors left many individual investors and financial professionals locked out of Bitcoin, despite its alleged availability. In fact, professional investors likely suffered more than individuals, so let's talk about them first.

Financial professionals are extremely limited in what they can access and invest in. For instance, it's not unusual for broker-dealers to be limited to offering investments from a specially selected list of options. This list would be curated by their investment platform based on various measures of suitability. Native bitcoin would definitely not make the list. Indeed, it's unlikely that other TradFi bitcoin products would make the list either. As a closed-end fund, GBTC had extremely high fees and did a poor job of tracking bitcoin's price, while the futures ETFs aren't designed for long-term use and 'leak' money month-to-month. As a result, this sizeable segment of the TradFi world had no realistic option for accessing bitcoin. Even those suffering from fewer limitations would have a hard time adding bitcoin to their portfolios. After all, bitcoin is very different to the assets TradFi typically deal with. Compared to almost anything else, Bitcoin would be difficult to get a hold of -- and even more difficult to safeguard once they had it. Consequently, it was likely to be ruled out for technical reasons or concerns about risk, even if there was an underlying desire to own it. All of this left bitcoin stranded, separated almost entirely from the trillions of dollars locked in the TradFi world; until the ETF.

ETFs are an incredibly powerful, flexible wrapper that can accommodate almost any asset or basket of assets. They are extremely popular and heavily used throughout the TradFi world, and for good reason. They generally operate with very low fees, they reliably track the price of their underlying asset(s), and they tend to offer a great deal of convenience. That's especially true in the case of the bitcoin ETFs as they eliminate any custodial concerns and make bitcoin tradable on highly trusted TradFi exchanges. So, while native bitcoin is difficult to deal with, presenting many challenges to would-be investors, bitcoin in an ETF acts like many other assets that TradFi types are used to. That means it can slot into almost any portfolio without headaches and drama.

Of course, the ETF wrapper won't instantly solve all accessibility issues. Bitcoin won't immediately appear on those curated lists of investment options just because it's now in ETF form. It will take many months, years even, for most trading platforms to list bitcoin as an investable asset for their clients. But, the point is, it's now realistic to expect them to list bitcoin. The biggest barriers to entry have been swept away. A bridge has been built between bitcoin and the TradFi world. That is the big unlock of the ETFs.

And it's not just the professionals that benefit here. Everyday individual investors will benefit too. Anyone who was previously too scared to hold their own bitcoin or to use shady, upstart crypto exchanges no longer needs to do those things. Bitcoin will be available on the investment platforms most people already know, use, and trust. And the bitcoin itself will be safely locked away with reliable and closely monitored custodians.

For large groups of users, the ETF will be the way to gain bitcoin exposure. For others, it may just be a stepping stone on the path to becoming a true crypto-native. This is exactly what happened in the wake of gold's ETF launch in the early 2000s. In the years that followed, ownership of physical gold also increased as people became more comfortable and familiar with the asset. In that case, the ETF gave rise to a new generation of goldbugs. I wouldn't take it as a given, but as the easiest, safest, and most convenient gateway to bitcoin, the ETF might just do the same thing for crypto.

Changing The Conversation & Legitimising Crypto

Increasing bitcoin's accessibility is a win in its own right, but it also brings second-order benefits.

Now that TradFi types can see and easily access bitcoin in a format they are comfortable with, it will suddenly seem a little less alien and scary. Previously, Bitcoin was something strange, potentially even dangerous, existing in the shadowy fringes of the financial system. It was easy to overlook, easy to disregard without a second thought. After all, why would someone spend time considering and learning about bitcoin if they couldn't realistically own it? It would be much easier to ignore it -- and perhaps wave it away as a scam if the price suddenly increased. But now bitcoin is an asset like any other. It's much less scary, less difficult to deal with, and harder to totally ignore. That doesn't mean every investor will now rush to buy bitcoin. The ETFs don't inherently make bitcoin more desirable or create new reasons to own it. They simply remove barriers to entry. They make it more difficult to immediately, automatically dismiss bitcoin as an option. And that means more people will need to actively consider and evaluate the asset -- something they haven't needed to do in the past. Some will continue to reject bitcoin after that. Others will find their opinions entirely transformed. NLW put it best in a recent episode of The Breakdown, explaining that the ETF launch provides a context for people to re-evaluate Bitcoin in a new light. They will ask is this really any worse or more risky than anything they already own. Or could it, in fact, be a credible entry in a diversified portfolio?

Having said that, the simple existence of a spot Bitcoin ETF is perhaps less impactful and beneficial than some might suggest. I don't believe an ETF launch is inherently a game-changing move for Bitcoin. There are all manner of weird and overlooked ETFs out there that are unattractive, unsuitable, or unavailable to most investors. A Bitcoin ETF could easily sit alongside those other niche products. If, for example, the only ETFs on the market were provided by crypto-native firms like Grayscale and Gemini -- or even by the ever-optimistic and tech-forward Ark Invest -- then the benefits would be somewhat muted compared to what we're seeing now. The launch just wouldn't pack the same punch. What makes this launch so special, and so pivotal for Bitcoin's future, is the fact that a string of massive financial companies were eager to have their Bitcoin ETF approved. Juggernauts like Fidelity, Franklin Templeton, and -- of course -- BlackRock have all launched their own Bitcoin products. What's more, in the run-up to the launch they all engaged in a heated battle to make their ETF the best and most desirable, whether that was through cutting fees, special launch offers, or other marketing gimmicks. That is the sort of thing that will make sceptics reconsider. After all, these firms wouldn't want to associate themselves with an asset like Bitcoin if all the worst rumours about it were true. Much less would they scrabble and stampede to become a market leader -- the TradFi face of Bitcoin. Surely, if these titans of industry are backing Bitcoin, then it can't be all bad. It can't be entirely worthless or used exclusively by criminals and money launderers. There has to be something more to it.

And it gets even better from there. Simply associating Bitcoin with these TradFi giants would be a massive boost for its image, but those same companies will also be actively advertising and advocating for Bitcoin to their clients. If the clamouring competitiveness ahead of the ETF launch was anything to go by, financial professionals across the US are about to find themselves inundated with Bitcoin marketing material. That will surely boost people's understanding and opinions of Bitcoin.

The biggest influence is surely going to be that of BlackRock and its chairman and CEO Larry Fink. The ETF launch wouldn't be a true paradigm shift without them. BlackRock exists on an almost unbelievable scale. Some even argue they are an extension of the US Government itself. The fact that they have put the time and effort into creating a Bitcoin ETF says something about Bitcoin. These guys don't play around. And it says even more when Larry Fink goes on TV and promotes Bitcoin like a true Bitcoiner, describing it as a digital gold and flight to quality asset. When Larry Fink says something, people listen -- and then follow his lead. For example, he pretty much kickstarted the financial world's focus on ESG assets by publicly embracing them in 2018. His decision to stop using that term marked the pivot back to oil, gas, and 'energy security' investments following the invasion of Ukraine. So, now that he's backing Bitcoin, it wouldn't be surprising to see others do the same. At the start of the last bull cycle, the legendary fund manager and macro trader Paul Tudor Jones called Bitcoin the 'fastest horse' in the fight against inflation and monetary debasement. That brought a significant sense of legitimacy to Bitcoin as an asset. It gave other macro traders permission to discuss and consider its place in a portfolio. Larry Fink is now fulfilling that same role but with orders of magnitude more importance and influence.

A Poisoned Chalice?

It's clear that the ETF brings some major benefits to Bitcoin -- benefits that should, in theory, expand Bitcoin's appeal and push the price much higher. But you can also argue that the ETF represents something of a poisoned chalice. After all, isn't an ETF entirely antithetical to Bitcoin's original values and intentions?

That's a point that has been made by many of Bitcoin's critics and detractors recently -- though a fair few supporters have aired the same view. And, to an extent, they are correct. Bitcoin is very much 'the people's money'. It was built to take power away from governments, central banks, and financial institutions. It was designed to eliminate reliance on third-party companies, instead enabling sovereign individuals -- giving people complete control and ownership of their assets. Therefore, packaging bitcoin in a product offered by a financial giant like BlackRock raises an inevitable sense of irony. But there's also a degree of nuance here that is often overlooked. Being a sovereign individual doesn't mean you must take full possession and control of your Bitcoin. It means you have the choice, ability, and freedom to do that -- just as you have the choice, ability, and freedom to let a financial institution hold that bitcoin for you. I strongly believe in the principle of self-custody. It's one of Bitcoin's greatest innovations and a feature that must be preserved at all costs. But I recognise it's not right for everyone, and that a broad spectrum of custodial solutions should be available -- including solutions where bitcoin is little more than an IOU in an ETF wrapper. The existence of those alternative solutions does not diminish or detract from Bitcoin or its original values. Additionally, Bitcoin is an open and permissionless system that is owned equally by everyone and no one. On one hand, that does mean it's 'the people's money', but, at the same time, it makes it equally accessible and useable to financial institutions. At the end of the day, anyone can use it however they like. Anyone can build products and services around it, including companies like BlackRock. It belongs to them as much as it belongs to us. And, crucially, Bitcoin does not become immediately dependent on someone just because they're using it or building products around it. Nor does it treat them specially or differently from anyone else, even if they are an incredibly wealthy and powerful financial institution. There certainly is a chance that Bitcoin is captured and altered beyond recognition by these companies -- we'll touch on that in a moment -- but it's by no means a given.

With all this in mind, it's pretty clear that it would be oversimplifying things to claim that Bitcoin has 'sold out' or lost itself with the launch of the ETF. Plus, it would be totally unrealistic to expect Bitcoin to continue its growth in a vacuum, without ever gaining the support of any TradFi giants. Their support was inevitable if Bitcoin is ever going to become a widely used and respected financial asset. At the same time, there is an undeniable sense of incongruity seeing Bitcoin tamed and wrapped up in products offered by some of Wall Street's biggest firms. But that's not necessarily a betrayal of its core values. However, the ETFs do raise some questions and concerns about Bitcoin's future.

Governance Concerns

For example, there are questions about the influence of ETF issuers on Bitcoin's governance.

In some cases, these firms might want to support the maintenance and development of Bitcoin. In fact, Bitwise and VanEck are already donating a portion of their ETF fees to Brink to help fund Bitcoin developers. This is likely the start of a trend of institutions building on and contributing to crypto development -- just as they already do with other open-source projects like Linux. To an extent, this is a good thing. Long-term developer funding has always been a concern around any crypto project, especially Bitcoin. But it also raises questions about how much influence these firms could gain. What if they were to push for developments that crypto-natives and Bitcoiners find unpalatable? If the majority of Bitcoin developers are working for TradFi firms, then it may be difficult to oppose. I'm sure that most of the developments they fund will not be sinister in the slightest. After all, any attempt to radically alter Bitcoin would almost certainly destroy both its reputation and value. Plus, as far as I know, Linux has never been infiltrated and corrupted by evil, corporate-backed developers. However, that doesn't eliminate the concern entirely.

Something that does help is the knowledge that any controversial change to Bitcoin would inevitably result in a chain split. But that raises questions of its own. These financial giants will surely wield outsized influence in the event of any chain split, regardless of who caused it and why it's happening.

Crypto-natives will argue that it doesn't really matter what these companies do as long as users run their own nodes. By doing this, users define the specifications and rules of the chain they believe is real -- anything not conforming to those rules is ultimately irrelevant. The Blocksize War proved that this was a very powerful mechanism for settling disputes. In that case, many crypto companies and exchanges stood against the community in their desire to increase Bitcoin's block size, and they ultimately lost. However, it's not clear if the same tactic would work against companies with the scale and resources of BlackRock. Yes, some individuals running nodes would continue to enforce their own version of Bitcoin. But that version would almost certainly be economically smaller and less secure than the Wall Street-backed alternative. Plus, the general awareness of the breakaway blockchain would be much lower. I suspect that the vast majority of people would happily go along with whatever the big financial companies declare Bitcoin to be, blissfully unaware that alternatives exist. And, even if they did know about the smaller fork, there would be little incentive to use it. Depending on your view, that could represent the death of Bitcoin. Others would disagree, arguing it doesn't matter what most people are doing and using. The alternative chain would continue to function as if nothing had happened; therefore, Bitcoin lives on. Maybe we'd even see history repeating itself, with Bitcoin's life playing out in cycles. Maybe the smaller, ideologically driven Bitcoin fork would steadily grow and gain momentum over the years, backed by those who want to free themselves from Wall Street tyranny -- only to see it captured and commoditised again!

Of course, I'm being somewhat facetious. And maybe I'm overthinking an event that will never come to pass. But there's definitely a risk here that should be taken seriously. And it makes me wonder, how much worse could such an event get? What if, say, running your own node was made illegal? In that case, there would be almost no defence against the capture of Bitcoin. Thankfully, such a law is incredibly unlikely to pass -- at least in liberal democracies. But it's not totally inconceivable. Especially if my next concern is ever realised.

Regulation Concerns

The ETF issuers are now stakeholders in the Bitcoin and crypto ecosystem. And, while crypto-natives would surely recoil at the idea, they're also representatives of it -- at least to an extent. But they are by no means aligned with the industry; they don't hold the same values and beliefs as most crypto-natives. And, that makes for a particularly dangerous combination.

Many countries are still in the early stages of regulating crypto, with relatively few examples of comprehensive, tailor-made crypto rules anywhere in the world. Lawmakers and regulators continue to consider and debate the best way forward. And, far too frequently for my liking, they will sometimes make ill-judged or even malicious proposals that could cripple the industry in a given jurisdiction. This is where the influence of these TradFi giants comes in. Up until now, the industry has been incredibly effective at mobilising to fend off or amend harmful proposals -- especially in the US. This has relied on the incredible efforts of industry advocates and lobbyists, but also on thousands of passionate individuals who have written to or called those in power and urged them to reconsider their rules. But what happens when colossal, highly respected, and influential financial companies like BlackRock get in the middle of this? What happens when Larry Fink weighs in on policy discussions? Sadly, their opinions will likely hold more weight than those of a thousand anonymous individuals. And, as much as we can hope they're on our side, they aren't likely to argue our case for us. Crypto-natives care deeply about maintaining open, permissionless standards. They tend to care about privacy and the right to self-custody assets. TradFi firms won't care about any of these things. If anything, they are incentivised to oppose them. As the biggest purveyors of highly controlled, permissioned, and custodial crypto, they would be the winners if true crypto was ever outlawed.

Consider things like the Digital Asset Anti-Money Laundering Act. This bill, proposed by Elizabeth Warren, is seen by many crypto-natives as a thinly veiled attempt to kill the industry in the US. The Act intends to extend KYC requirementsRe across almost every aspect of a crypto network, covering everything from validators and miners to wallet providers. However, many of those participants would never have access to the information they need to satisfy the rules. It would be impossible for them to comply even if they wanted to. Despite its many flaws, it wouldn't be surprising to see TradFi firms supporting regulations like this. After all, if they offered any crypto products they would be highly permissioned, KYC'd, and therefore largely unaffected by the rules. In fact, the Bank Policy Institute -- a lobby group representing Wall Street banks -- have already shown support for it. And that support will count for much more if the banks providing it can also be considered 'industry participants'. That would change the conversation entirely. While some rule makers would still take the time to understand the issues at hand and the flaws of the Act, others would look at the TradFi support and say "If these companies can meet the requirements with their crypto products, why can't everyone else". They wouldn't feel a need to dig in any further. Especially if critics use the industry's resistance to the rules as some sort of evidence of the industry's unruly and crime-ridden nature that needs to be cleaned up.

The political influence of these companies, combined with their ability to change the perception of our fight against draconian rules, means the threat of harmful regulation cannot be underestimated -- now more than ever before. For the crypto's enemies, the entry of TradFi firms into crypto represents a new opportunity to push through destructive regulation, all while appearing pragmatic enough to gain the support of these supposed industry representatives. Elizabeth Warren's Act is unlikely to succeed. But other, similar proposals will be made, and some of those will have a genuine chance of becoming law. When that happens, and the ETF providers weigh in on the debate, then we'll finally find out if we've made a deal with the devil in getting these ETFs approved.

Other Stuff

While the potential impact of the TradFi ETF issuers on governance and regulation are my primary concern, I've seen a few other issues that are worth mentioning.

Some have highlighted that a single custodian -- Coinbase -- will be responsible for looking after most of the ETFs' bitcoin. That creates a giant honeypot for hackers and a massive single point of failure for Bitcoin. It's worth noting that Coinbase Custody has already held a lot of Bitcoin for a long time without any problems, so there's no reason to be particularly worried about this. The inflow of new bitcoin won't dramatically increase the risk of an incident, it would just worsen the impact.

If anything were to go wrong with Coinbase, or with any other custodian, it would create another intriguing scenario. Would the scale of the hack be enough for the ETF issuers to call for a rollback of the Bitcoin blockchain? Of course, they wouldn't be able to click their fingers and demand a change. That's not how Bitcoin works. But they could offer a massive bounty to any miners willing to build an alternative history where the hack never happened. The idea of an incentivised reorg was thrown around a few years ago after Binance was hacked. It didn't make sense at the time due to the size of the loss, the time since it occurred, and the fact that it could damage Bitcoin's reputation and credibility. But would these TradFi firms, less enamoured with Bitcoin ideals such as immutability, be more willing to give it a try? If the loss represented a significant portion of their AUM, it's certainly conceivable. And the question would then become, how much would Bitcoin's reputation suffer as a result?

The other risk of holding so much Bitcoin in one place is that it makes it much easier to seize. Bitcoiners love to talk -- and worry -- about Executive Order 6102, which made gold ownership illegal in the US in 1933. While it's incredibly unlikely to happen today, I suppose it's possible to imagine some extreme form of financial repression that involves the confiscation of all hard assets. In that case, it would be easy for a government to seize any bitcoin held through centralised entities like the ETFs. Again, I really don't think this is worth worrying about. Not least because a world in which governments are seizing people's crypto is probably suffering from many, far worse problems as well. But, as this would likely rank surprisingly high on many Bitcoiner's list of concerns, it felt right to include it.

The final concern I've heard that is worth mentioning is that the ETFs could represent the beginning of the final financialisation of Bitcoin. Eventually, this could weaken Bitcoin's hard cap and dilute the supply through the creation of synthetic coins. The idea is that as the TradFi world embraces crypto, they will introduce large-scale, leveraged products where bitcoin are leant out and rehypothecated. This would lead to some people thinking they owned bitcoins that simply don't exist, something they may not find out until disaster strikes and their IOU turns up worthless. While this concern is technically valid, it's neither a new nor immediate threat. None of the ETFs currently approved for trading are allowed to lend out their Bitcoin; they must hold them one-for-one. This will surely change down the line. At some point, Bitcoin will become heavily financialised and will likely suffer some of the consequences of this. But that's also an inevitable part of Bitcoin growing up and gaining widespread adoption. Plus, we've already seen smaller examples of financialisation -- and the dangers of it -- through the various Bitcoin banks that have emerged -- and exploded -- in recent years.

To me, all of these issues are worthy of brief consideration, but they pale in comparison to the more pressing existential threats discussed earlier.

Conclusion

I've heard the ETFs being described as a Trojan Horse on a few occasions. Usually, the speaker is excited about the prospect of Bitcoin infiltrating the TradFi world, priming it to disrupt and crypto-ify Wall Street. But the analogy works the other way too. Perhaps this is TradFi's way of infiltrating and taming crypto.

The ETFs are certainly worth getting excited about. They have brought Bitcoin into the big leagues, making the asset more accessible and respectable than ever before. They've given massively influential players like Larry Fink an excuse to promote Bitcoin, potentially leading to the biggest orange-pilling moment in all of Bitcoin's history. They're clearly a big deal and, if nothing else, Bitcoin's price is likely to benefit from them over the next few years. But they also introduce new risks, threatening to pacify Bitcoin's cypherpunk nature and corrupt its ideals in worst-case scenarios. While many in the industry are feeling joyous now, there's a chance that we are watching the beginning of Bitcoin's downfall.

For those of us who want to see more than just 'number go up', the next few years may be the most critical and future-defining period in the industry's history. We may need to work harder than ever before to preserve everything we like about this technology, to keep its essential features legal and accessible to all. Some might argue that the ETF approval represents an endpoint -- some kind of victory over TradFi and the SEC. I can't help but think this is just a beginning. Yes, the beginning of a new era for Bitcoin in which it may be respected and widely held. But also the beginning of a new battle for the future of crypto, and for the future of the digital and financial worlds as a whole.

The SEC's final decision is expected in May and some would argue that an approval looks almost certain. After all, ETH Futures ETFs have already been approved -- and Grayscale's legal victory over the SEC, which forced them to allow Bitcoin ETFs, hinged on the previous approval of ETFs for Bitcoin Futures. Therefore, denying the ETH ETF would drag the SEC into further legal battles that they would, inevitably, lose. At the same time, we have BlackRock, the world's largest asset manager, putting their weight behind an ETH ETF as well -- just as they did for Bitcoin. The company's Chairman and CEO Larry Fink has even come out in the past few days to speak directly about his desire to see the ETH ETF approved, and he's a man with great sway in the American political system.

Still, SEC chair Gary Gensler continues to treat crypto with utter disdain, using his statement on the approval of the Bitcoin ETF to let everyone know that he was dragged kicking and screaming to that decision. His track record of launching, and largely losing, legal cases against various crypto firms suggests he doesn't care about how much of the Commission's time, money, or resources he wastes in frivolous lawsuits. Nor does he seem to care about the Commission's core aims of protecting investors and maintaining orderly and efficient markets. If he did, he would have approved the spot Bitcoin ETF many years ago, providing a safe and credible alternative to the unscrupulous offshore exchanges he claims to worry about and predatory TradFi products like the Grayscale Bitcoin Trust -- something so toxic and harmful to investors that it essentially underpinned all of the failures in 2022's crypto catastrophe.No, it's demonstrably clear that Gensler cares about his own career above everything else. Every action he takes intends to bolster his image and score political points with the aim of, eventually, being promoted to Treasury Secretary. As such, it wouldn't be entirely surprising to see him deny the ETH ETF and embrace the legal battles just because he can, and because that's what his political allies probably want to see.

Therefore, I think it's important to not get too carried away with expectations here. We can hope for an ETH ETF this year, but I wouldn't bet the farm on it just yet.

--

Aside from "when ETH?", the approval of spot Bitcoin ETFs raise some interesting and significant questions about the future of crypto. I explore those questions here.

Ethereum needs you!

Ethereum's next major upgrade is in development and -- for the first time -- ordinary, non-technical people like you and I can help create it. But, the time to help is running out. You have just days left left to make your contribution. So, if you want to get involved, you need to do it soon. I'll show you exactly what you need to do to take part in this historic opportunity. And, don't worry, the whole process is incredibly easy, costless, and risk-free. In fact, it's as simple as wiggling a mouse and clicking a few buttons. Sounds good, right?

But, before I show you what you need to do, I should probably explain why this is happening in the first place.

What Is Happening?

What you'll be contributing to is called the KZG Summoning Ceremony.

Now, I appreciate that's a bit of a weird and fancy name that probably doesn't mean anything to you. So, what is it?

The short answer is that it's a trust-minimised process for setting up a new cryptographic scheme that Ethereum will be using after its next update. That update is called Proto-Danksharding (or EIP-4844), and it's all about cutting the cost of data storage to make Ethereum a better foundation for Layer Two platforms.

Again, that may well sound like a load of gobbledygook. If so, stick with me. To really understand this we first need to establish a little background information.

Some Background

Ethereum Sucks

If you paid any attention to crypto in the last bull run, then you probably heard a lot of people saying the same thing: "Ethereum sucks!" That's because, during times of high demand, Ethereum transactions are both slow and expensive -- especially when compared to competitors like Solana. You might assume this is because Ethereum is older than the cheaper blockchains and therefore has worse, outdated technology. However, that's not the case. In reality, Ethereum's poor performance and high fees are entirely intentional. You might think that's crazy. After all, why would anyone choose to provide a terrible user experience? In reality, it's because Ethereum is simply prioritising something else: decentralisation.

There's a lot that could be said here, but I'm going to save most of it for another time. What you need to know is that Ethereum is designed to minimise the barrier to entry for anyone wanting an active role in the network. In practice, that means the Ethereum software must be able to run on all sorts of computers -- including fairly cheap, low-powered ones. Therefore, Ethereum blocks cannot contain a large quantity of transactions or data because that would overwhelm the low-end computers in the network. As a result, it doesn't take a significant increase in transaction volume to saturate Ethereum's blocks. When that happens, users are forced to outbid one another to ensure their transaction is prioritised and included in a block. And that very quickly spirals into the sky-high transaction fees we all love to complain about.

Of course, Ethereans recognise the problem here. They certainly don't want to create a system that anyone can help run but only the rich can afford to use. And so they've come up with a plan. One that will allow them to retain the accessible, decentralised core of the system while also increasing capacity and reducing transaction fees. And that plan is called 'Layered Scaling'.

Layered Scaling

Layered scaling is ultimately about aggregating as much activity as possible into a small number of Ethereum transactions. The idea is to shift most day-to-day transactions away from Ethereum and onto new 'Layer Two' (L2) platforms. These platforms are built with performance in mind, ensuring transaction fees remain low even when demand is high. Then, every so often, all of the recent L2 transactions will be batched, compressed, and represented in a single transaction on Ethereum. In this way, all the activity still takes place on the Ethereum blockchain, just in a less direct manner. All the same, it means all of the L2 transactions are still verified and secured by Ethereum. That leads to the ultimate win-win scenario for end users. They still enjoy all the benefits of Ethereum and its robust, decentralised design but they don't suffer with its low throughput, slow transactions, and exorbitant fees.

Years of research have convinced Ethereans that this layered approach is the best way to build and scale a blockchain. The problem is, Ethereum wasn't built with this methodology in mind. So, some modifications are required to get the most out of a more modular design.

One of the biggest issues is storing data. Remember how Layer Twos aggregate all their recent transactions and represent them in a single Ethereum transaction. Well, that Ethereum transaction must contain a fair amount of data -- essentially a summary of all the L2's recent activity. And, here's the problem, Ethereum only has one kind of data storage: permanent. When an L2 -- or anyone else, for that matter -- posts a bunch of data to Ethereum, everyone in the Ethereum network must hold onto that data forever. That's not easy to do, and it places a significant burden on the computers in the network. So, this isn't good for Ethereum. Especially because its priority has always been minimising the burden on those computers to keep the network decentralised. The situation is also not good for the L2s. Ethereum doesn't want people filling blocks with data and overwhelming the low-end computers in the network, so it charges a high price for data storage. As a result, L2s must pay a lot of money to make their settlement transaction on Ethereum, and the L2's users must pay higher fees to account for that. Again, this is particularly silly when the whole point of the L2s is to provide a low-fee environment. So, we need a better solution for storing data. And, this is where Proto-Danksharding comes in.

Proto-Danksharding

Proto-Danksharding (officially named EIP-4844) will introduce a new type of transaction to Ethereum, and these transactions will unlock a new kind of short-term storage.

These new transactions are called 'blob-carrying transactions'. And, believe it or not, ‘blob’ is a technical term. It's short for Binary Large Object, which refers to an arbitrarily large chunk of data. So, when we say 'blob-carrying transaction', we just mean a transaction that is associated and travelling with some piece of data. Data that might, for example, summarise a whole bunch of L2 transactions. But, the word ‘blob’ is also quite appropriate here. I find it useful to think of these data chunks as literal sticky blobs that can cling to an Ethereum block like a barnacle on a boat. And, just as barnacles are scraped off of boats before they cause problems, these blobs will be scraped off of blocks and discarded before they overwhelm the network.

Yes, this is the big improvement that Proto-Danksharding will bring. Any data contained in a blob will only be stored on Ethereum for a few weeks. After that, anyone in the Ethereum network is free to delete and forget about that data forever, reducing the burden on all those devices. It's safe to do this because that information doesn't need to be stored for eternity. At least, not by all parties. The important thing is that the L2 data is distributed and made available to anyone who might need it. Sticking it onto the outside of an Ethereum block and distributing it across an un-censorable global network is a pretty good way to ensure all interested parties have access. After a few weeks, those parties should have had plenty of time to make permanent copies or do whatever they need to do with that data.

Blob-carrying transactions are a big win for Ethereum. The short-term storage minimises the strain placed on the Ethereum network and doesn't threaten its decentralisation in the way permanent storage might. It's also good for the L2s. Because short-term storage is less burdensome than permanent storage, a greater quantity can be offered at a much lower price. Therefore, Layer Twos won't need to pay anywhere near the costs they currently pay to settle on Ethereum, and they can pass those savings on to end users.

Overall, then, Proto-Danksharding and blob-carrying transactions represent a massive step forward for Ethereum and its layered scaling ambitions. But, you're probably wondering, what has any of this got to do with the whole KZG thing that we started with? Well, you're about to find out.

KZG Commitments

We've just seen that a 'blob-carrying transaction' is a transaction sent alongside and associated with some arbitrary piece of data. As well as travelling together, the transaction and blob are associated through a special reference or summary that is embedded in the transaction. It's worth noting, because it's part of a transaction and included in an Ethereum block, this reference does become a permanent part of Ethereum's history -- even after the blob itself is discarded.

The reference is something called a KZG Commitment to the blob. Well, more accurately it's a versioned hash of a KZG Commitment to the blob, but that's not super important to us here. KZG Commitments, and commitment schemes in general, can be used to prove ownership or knowledge of some information without revealing the information itself. Later, after the information is revealed, the commitment can be used to authenticate that information. That authentication would fail if there was even a single, tiny difference between the information committed to and the information revealed. In the case of Proto-Danksharding, KZG Commitments give users an efficient way to verify that blobs contain all the information they supposedly contain and that L2s aren't misbehaving. KZG Commitments can also be used to prove that a certain piece of data was contained in a blob. This is essential for a type of L2 called an Optimistic Rollup, as they rerun disputed transactions on Ethereum to verify the results. Of course, there's no point rerunning a transaction that never actually happened on the L2, which is where the KZG proof comes in. When someone raises a dispute, they must also provide a KZG proof to show the disputed transaction took place and was included in a blob.

KZG Commitments were chosen over alternative commitment schemes for several reasons. For starters, they're simpler to implement than the alternatives. That reduces the opportunity for errors or exploitable weaknesses to make it into the code. They're also fairly cheap and efficient to work with -- which helps Ethereum's drive for decentralisation. They work well with Zero Knowledge Proofs, which is essential for a type of L2 called a ZK Rollup. And, perhaps most importantly, they lay the foundations for another future upgrade called Data Availability Sampling. There are only two notable downsides to KZG Commitments. First, they're not quantum-resistant, so there could be security issues if someone develops a powerful quantum computer. Frankly, that's not worth worrying about today, and when it does happen there will be so many other things at risk it probably won't matter much then either. The second issue is more immediately concerning. KZG Commitments require something called a trusted setup. And, that's where the Summoning Ceremony comes in.

Trusted Setups

Why Is A Trusted Setup Required?

I don't want to get too bogged down in how KZG Commitments work for two reasons. One, I just don't have the maths skills to understand and explain them properly. And two, even if I did have those skills, you probably don't care much anyway. Still, I think it's useful to have at least a vague understanding of what's going on here. So, here goes.

To generate a KZG Commitment, the data being committed to is first converted into a polynomial. You'll probably remember these from maths class as equations that look something like:

In this case, the polynomial will be much bigger and scarier than anything you encountered at school, but it's essentially the same thing. That polynomial is then evaluated at certain points -- which is to say, some numbers are plugged in to see what comes out. And, that stuff that comes out is the KZG Commitment. When someone wants to verify the data later on, they can effectively repeat the process. By evaluating the polynomial at the same points, they can see if the output matches the original commitment. If it does, everything is fine and the data was the same. If it doesn't, then something has been changed.

Now, here's the bit that's most relevant to us. The numbers that are plugged into the equation should remain secret. Like, really secret. Not even the developers setting this whole thing up should know what they are. If someone did know the numbers, they could cheat the system by crafting a new polynomial that produced the same output. In other words, they could commit to one set of data, then change it entirely but still provide a valid proof. This would, quite obviously, undermine the entire system, so it cannot be allowed to happen.

This raises some questions. First, how can numbers be kept secret, but also passed around so everyone can commit to or verify the date? Second, how can anyone trust that t hose numbers are genuinely secret? After all, someone has to come up with those numbers, and surely they'd know what numbers they'd selected.

Keeping Secrets

Let's start with the first question. How are the numbers kept secret? Well, for clever mathematicians, this is fairly easy. The answer is using something called an elliptic curve. Elliptic curves are a special family of curves defined by equations that look like:

If you plug some numbers into that equation and draw the results on a graph, the curve you see is an elliptic curve. These curves have some weird and unique properties that make them particularly useful in maths, computer science, and cryptography. In fact, a whole bunch of important cryptography -- including much of the cryptography in this industry -- relies on elliptic curves. The properties we care about most are that points on an elliptic curve can be added together to produce a third point that is also on the curve. When this is done, it's difficult to predict where the third point will be. And, when points are repeatedly added together, it's incredibly difficult to determine how many times the points were added. Mathematicians can use this to hide numbers inside an elliptic curve. Essentially, they take the 'secret' number and add elliptic curve points to themselves that many times. The output of this calculation is a list of elliptic curve points that appear totally random when plotted on a graph. This is called a Structured Reference String (SRS), and an attacker could study it to their heart's content without ever learning anything about the secrets held inside. However, quite amazingly, the SRS still contains enough information about the secret values to be useful in constructing KZG Commitments.

Trusted Setups

That answers the first question. Ethereum can keep its secret numbers secret by hiding them inside an elliptic curve. The secret can be represented and passed around in the form of elliptic curve points -- a long list of seemingly random, disconnected numbers called a Structured Reference String. These numbers contain enough information for the KZG scheme to work, but not enough for attackers to undermine the system. But where does the SRS come from? Who produces it, and how can they reassure others that they don't know the secrets held within?

The answer here is to use something called a trusted setup, and the principle of it should be pretty familiar to anyone interested in cryptoassets. After all, this industry's entire purpose is to remove singular trusted entities and replace them with large, disparate networks of individual operators, thereby increasing overall trust in the system. Yes, the idea of a trusted setup is to involve as many people as possible in crafting the Structured Reference String. So, instead of one person contributing the entire secret, and then promising they don't know what that secret is, a trusted setup involves a large number of people each contributing a small portion of the overall secret. Each individual contribution is cleverly mixed in so that no one can determine what anyone else added. That way, even if someone knew exactly what they had entered, they wouldn't be any closer to discovering the ultimate, combined secret. In fact, the only way to discover the combined secret would be for every single participant to work together to recreate it. Put another way, provided the group contains at least one honest actor, the final secret can never be known. This is called a 1-of-N trust model. Alternatively, you might like to think of it like a Horecrux trust model -- an attacker must discover every single secret (like destroying every Horecrux) to beat the system. The larger the group of contributors, the more difficult that task becomes. It's like, if Voldemort had created 1000 Horecruxes, he probably wouldn't have lost. And, that's kind of intuitive, right? As the group gets larger, the probability that it contains at least one honest actor also increases. And so, the goal of a trusted setup is to maximise the number of honest, independent participants.

At some point, when enough different people contribute to the setup, the 'trusted' setup becomes effectively a 'trustless' setup. That's why some people prefer to use different, arguably less misleading, names for the process. For example, Ethereum's trusted setup is called a 'Summoning Ceremony'. Whatever you want to call them, trusted setups have been around for a while now. Zcash held the first high-profile setup in 2016. That was a fairly complicated and involved process, so the ceremony only included 6 very knowledgeable participants. Modern setups tend to be simpler and more accessible, enabling hundreds or even thousands of participants to take part. Ethereum's Summoning Ceremony will be the biggest trusted setup yet -- and by a massive margin. More than 120,000 contributions have been made so far, easily making this the most trustless trusted setup ever.

How Does It Work?

Now we understand the principle, but how does the Summoning Ceremony actually work? Well, it's kind of like a game of pass-the-parcel played backwards. In this case, the parcel is the set of elliptic curve points. By "played backwards", I mean each player adds something to the mix instead of removing something. And, as you can probably guess, the thing being added is the participant's secret random number. In the middle of all of this is a 'sequencer' or 'coordinator', who keeps everything organised and running smoothly. For the KZG Ceremony, the coordinator is a server run by the Ethereum Foundation. It keeps track of who wants to participate, orders participants, and verifies their contributions. If the ceremony is like a game of pass-the-parcel, then perhaps the coordinator is the parent overseeing the game and ensuring it's played properly. Of course, the idea of this special, powerful entity at the heart of the ceremony may concern you. If so, don't worry, we'll come back to this in the next section. For the moment I want to go a little deeper into how each participant in the ceremony adds their random number into the mix.

When a participant joins the Ceremony, they generate a secret random number. Later, when the coordinator says it's their turn, they will receive a long list of more than 4000 numbers. This is the set of elliptic curve points containing the combination of all previous participants' secrets. Now, the participant can mix their secret in as well, and they do this through multiplication. They take their secret number, and essentially just multiply each of the elliptic curve points by that number. OK, it's a little more complicated than that. In truth, they multiply by their number to a power according to where the point is in the list. So, it's to the power of 0 at the first point, the power of 1 at the second, the power of 2 at the third, and so on. Plus, importantly, this is all done over something called a finite field. These work a bit like a clock in that numbers reach some maximum value and then loop back around to a lower bound. That means two numbers could be multiplied together to produce a smaller number. Still, essentially just multiplication. Once they've done that, they discard their secret and send the updated list of numbers back to the coordinator. The coordinator performs a quick validation and then sends the list to the next participant to repeat the process.

I found it useful to see this written out a little more mathematically, but feel free to skip this paragraph if you're not into it. With some generic equations, the process looks like this. The participant receives a bunch of elliptic curve points that can be written like:

where G is some generic starting point for the elliptic curve being used and s is the combination of all previous participants' secrets (which our participant doesn't know). The participant has randomly created their own secret value t, which they can now multiply in:

Which is equivalent to:

From this, we can see that the final secret, produced at the very end of the Ceremony, is just a product of every individual participant's secrets. And, each elliptic curve point is related through those secrets, despite appearing as a random selection of numbers. As long as each individual keeps their secret to themselves, it would be extremely difficult to determine what numbers were multiplied together to produce the final set of elliptic curve points. In fact, because the finite field keeps everything looping around, it's impossible to work it out.

Participants in Ethereum's KZG Summoning Ceremony will be doing this for two sets of elliptic curve points each time. That's because the KZG Scheme requires two sets of related but slightly different points to work. They will also do the entire process four times over. As in, four entirely different setups with four different pairs of elliptic curve points, each with a different length. This is part of Ethereum's plan to future-proof things as much as possible. In the future, it may be desirable to make certain changes to blobs -- changes that would necessitate a longer set of elliptic curve points to produce secure commitments. If that happened, a new Ceremony would be required to produce those points, creating unnecessary delay and hassle. So, Ethereum's developers had an idea: why not run multiple setups at the same time? That way, everything is ready and waiting for if/when those changes are made.

What Are The Risks?

Earlier we saw that the Summoning Ceremony relies on a special entity called the 'Coordinator' to keep things running smoothly. And, to someone interested in cryptoassets, that might raise an alarm. Doesn't the Coordinator sound like the kind of privileged central player that we want to eliminate?

Of course, the answer is yes. The coordinator is certainly a privileged party, and I'm sure it would have been eliminated if that were possible. Unfortunately, it's quite essential to the Ceremony. However, the coordinator's powers are quite limited, and all its actions are published for everyone to inspect and verify. This should minimise the threat it poses. The worst thing the Sequencer could do is unfairly exclude a participant. For example, it could incorrectly reject their valid contribution. But, because its actions are published, everyone would see that happening and know the Ceremony was compromised. Additionally, there will be a validation process at the end of the Ceremony. Every participant will be able to verify that their contribution was genuinely included in the final product. This transparency is incredibly important. If anyone raises any genuine concerns at any point in the setup, the social consensus will be to reject the Ceremony and start over -- making any changes necessary to prevent the problem from happening again. As a result, I don't think the coordinator poses a real threat to the procedure.

Realistically, the only other threat to the Ceremony is some massive technical failure. For example, a bug might cause every participant's secret to leak. If that happened, then it would be possible to reconstruct the final secret, regardless of the number of honest participants. However, the chance of this happening is extraordinarily low -- especially because a lot of effort has gone into minimising the risk. For starters, there are multiple implementations of the contribution software, and they're all built using different technologies. For every contribution to leak, the same bug would have to be present across all of those different variations. It would need to work on every type of device, on every browser, every single time the process runs. In short, it's totally unrealistic. And yet, there are even more protections in place. In addition to allowing standard contributions through the browser, people have also been invited to make special contributions to the Ceremony. In special contributions, participants can generate their secret random number in all sorts of wacky and weird ways. For example, they might use a Geiger counter, a cat toy, or an explosion as a source of entropy -- though, presumably not all of them at once. The point is, however these numbers are generated, it's utterly inconceivable that they would all leak alongside all of the standard contributions. And, remember, that is exactly what would have to happen to truly undermine the ceremony. As long as a single number remains secret, the final output also remains secret. Therefore, I think it's pretty safe to say the Summoning Ceremony's secret is safe and sound.

How To Contribute

Getting involved in the KZG Ceremony is extremely easy, and the requirements for entry are very low. You will need only three things:

1. A computer to contribute from. Unfortunately, mobile devices will not work here.

2. A valid browser (which seems to be anything other than Safari)

3. Either:

   • An Ethereum Account that had made at least 8 transactions before January 13th 2023

   • A GitHub account

These restrictions are to try and prevent massive Sybil attacks. When the Ceremony first opened, the lobby was frequently flooded with airdrop farmers each trying to contribute with multiple addresses. While that's not necessarily a problem, it was limiting the number of unique users that could take part. As a result, the rules were adjusted so that most participants are relatively unique humans and not tens of thousands of identical robots.

If you meet those criteria, then read on to see how you can contribute.

Step 1

Head to https://ceremony.ethereum.org/ and click begin.

Step 2

A new tab will open. This is where you generate your secret random number.

As the page explains, the randomness comes from three sources. The first is called the secret, which is whatever you type into the text box. This can be as long or short as you'd like. The only suggestion is that you try to add something a bit random into the mix so even you don't know what you've written. The second source is called the sigil, which is taken from your cursor's movements. The third source is called the sample, which your browser will generate in the background.

So, type something in the text box and squiggle your mouse around. You'll see the serpent's tail growing longer as you move your mouse. You need to keep jiggling until it eats itself. Then, click submit.

Step 3

You'll be asked to sign in.

As mentioned earlier, you can either use Github or your Ethereum address. If you use your Ethereum address, it will ask you to sign a couple of messages from Sign In With Ethereum. Don't worry, this won't cost you anything or take any assets from your wallet, it's just signing a message. But, as you should every time you sign a message, just take a moment to double-check that everything looks legitimate.

Step 4

The hard work is all done now, and all you need to do is wait. Just don't close the window or switch your computer off until you receive a confirmation message.

The screen will tell you how many others are in this waiting room with you. The coordinator will make random selections from this room when choosing who to go next, rather than selecting on any kind of first-come-first-served basis. That makes it impossible to know quite how long you'll have to wait.

When I initially contributed earlier in the year, it took several days before I was selected. But, at that time the waiting room generally contained several thousand people. The waiting room is much less full these days, so I'd imagine the waiting time will be measured in hours at worst. This time through, it took less than 10 minutes.

Eventually, the screen will change to let you know you have received the Structured Reference String -- here called the Powers of Tau -- and that your secrets are being mixed in.

The screen will change again once the calculations have completed and the Coordinator has received your updated SRS. When you see this, congratulations: you have just contributed to Ethereum's next upgrade!

At the time of writing, there is just over a day left to get your contributions in. The Ceremony will be open until the 23rd of July. At that point, I would imagine they will just close the lobby for new entrants, so anyone already inside will be allowed to complete their contributions. However, if you do want to contribute, it’s probably best to get in sooner rather than later to avoid disappointment.
And, if you are on the fence about whether to contribute or not, I would definitely recommend it. After all, it takes very little effort and you’ll be able to say you were a part of this special moment in Ethereum’s history.

If you want to do any further reading on KZG Commitments, I would recommend  this piece by Inevitable Ethereum or this blog post by Dankrad Feist (the Dank in Proto-Danksharding).

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Disclaimer: Anything expressed here is my own opinion stated for informational and educational purposes; nothing I say should be taken as investment or financial advice. Many projects mentioned on this channel are highly experimental and therefore come with risks. Please evaluate your own risk tolerance before experimenting with these projects.

I may own some of the cryptoassets mentioned. At the time of upload (July 2021), I own: Bitcoin (BTC), Ether (ETH), and USDC

How Should I Prepare For The Merge?

The short answer to this is you don’t need to do anything to prepare for the Merge. 

The confusion around this update has unfortunately created an opportunity for scammers to trick people into giving up their ETH. So I want to make this really clear. You will not need to do anything to prepare for the Merge. There is no new version of ETH that you will need to swap your coins for; there are no special wallets or MetaMask updates that you will need to install; you do not need to do a thing. 

From a user’s perspective, the Merge will be completely invisible. Everything that exists and works on Ethereum under Proof of Work (PoW) will exist and work in exactly the same way under Proof of Stake (PoS). It will not change anything.   

The only people who will need to make changes ahead of the Merge are those running Ethereum nodes, such as block producers. These people will know who they are and will almost certainly have prepared themselves by now — especially as the deadline for some updates has already passed. 

So, please, if anyone tries to convince you to do something to "prepare for the Merge", do not do what they say, it's almost certainly a scam. 

But I’ve Heard I Can Make Money Off This

OK, we’re getting into some dangerous territory here so I want to make it really clear that I’m not telling you to do anything. I'm not advocating for you to follow a particular strategy or buy a particular asset. All I am doing here is stating my opinion on what might happen.

That said, there's clearly a lot of excitement about the possibility of a miner-led fork of Ethereum at the time of the Merge. If that happens, everyone who owns ETH or any other asset on Ethereum would receive additional, duplicate coins on the new chain. Naturally, a lot of people want to position themselves to take advantage of that. 

If you haven't heard about this, the idea is that miners will try to preserve a PoW version of Ethereum after the Merge. To do that, they'll edit Ethereum's code to remove anything relating to PoS and anything else they dislike. By making these changes, they won't be aware of the Merge when it happens, and they won't know that new PoS blocks are being produced. They'll just keep producing new PoW blocks on top of the last pre-Merge block as if nothing had happened. 

That means their new blockchain, often called EthPoW, will retain all of Ethereum's history up to that point. So, anything that exists in Ethereum before the Merge will also exist on EthPoW afterwards. If you had 1 ETH and 100 USDC before the Merge, for example, you would own 1 ETH and 100 USDC as well as 1 EthPoW and 100 USDCPoW after the Merge. Sounds good, right? But, it's a bit more complicated than it seems. 

Some assets represent off-chain items that won't be duplicated after the Merge. The USDC in our example represents dollars held in a bank account. Those dollars won't magically multiply because a blockchain forked. As a result, the USDCPoW will not represent or be redeemable for anything -- it will be worthless. Similarly, any token representing off-chain assets will be worthless on EthPoW. That includes assets representing staked ETH, such as Lido's StETH, as staked ETH lives on the Beacon Chain rather than the main Ethereum blockchain.

After the fork, these assets will quickly reprice on the new EthPoW chain, and that will spark chaos across the chain's DeFi ecosystem. For example, on-chain lending platforms will be left with masses of bad debt, while exchanges like Uniswap will be drained of liquidity so only worthless assets remain. Some people will make a lot of money from the chaos, but they will be a tiny minority representing the fastest and most knowledgeable users. The vast majority of people trying to play this will almost certainly get wrecked.

Most people have recognised this and have followed an easier path. For example, some people are choosing to buy spot ETH while shorting ETH futures. That means they will receive EthPoW without exposing themselves to ETH's price swings. This method would be profitable as long as the cost of shorting is less than the EthPoW can be sold for.

Others are leveraging up on ETH to maximise their claim on EthPoW. Again, they'd make money if the EthPoW is worth more than the cost of borrowing. But, with so many people trying to make the same trade, the cost of borrowing has increased and I suspect many will end up losing money. 

Of course, these people need to borrow ETH from somewhere, and that creates a new opportunity to benefit from the fork. People who lend their ETH will forfeit their forked coins but should receive generous compensation with borrowing rates so high. However, the demand for borrowing also presents a risk. Currently, lending protocols are nearing 100% utilisation, meaning all of the ETH that can be borrowed is being borrowed. When that happens, lenders must wait for ETH to be repaid before they can withdraw. It's also worth noting that some people are being particularly cautious because of the Merge and are withdrawing from lending pools. I don't know exactly what they're expecting to happen -- DeFi protocols shouldn't be affected in any way -- but I understand their desire to play it safe. 

Of course, the easiest and least risky approach is to do absolutely nothing. In this case, you'd take no additional risk but still receive EthPoW (assuming your ETH is on Ethereum and not an L2). 

Personally, this is the approach I'm taking. In an ideal world I would have lent out more of my ETH, but frankly, I can't be bothered to move everything around to try and profit from this. 

I can't help but feel the whole EthPoW fork is being blown out of proportion. 

Futures markets show it will be worth just a few per cent of ETH, and I expect that to drop significantly in the days and weeks after launch. There may well be some crazy price action immediately after launch because of on-chain chaos, but that shouldn't last long. 

At the end of the day, there's no obvious need for this new chain and no audience that seems likely to use it or buy the coin. Why would it have any long-term value? I suppose similar arguments could be made against other prominent forks like Ethereum Classic and Bitcoin Cash, both of which have perplexingly high market caps to this day. But, at least those forks also had large, pre-established audiences that were ideologically aligned with them. EthPow appears to be exclusively backed by otherwise redundant miners and speculators looking to make a quick buck. Both of those groups will be looking to sell.

What's more, I'm not sure if the EthPoW chain will even launch. I haven't followed things too closely, but everything I've seen suggests that EthPoW is a slapdash effort. I don't know if it will be complete before the Merge, or if it will even work once it is complete. There's every chance that speculators have tripped over themselves chasing an opportunity that will never exist.

Of course, I could be totally wrong on that. Maybe EthPoW will launch, and maybe it will be a massive success that proves doubters like me wrong. I'm just saying things as I see them. And, that's why you shouldn't take anything I say as actionable advice. 

The only advice I am willing to give is that you should make sure you absolutely know what you're doing before trying to make any financial play around the Merge or EthPoW fork. If the chain does launch, you might want to check multiple reputable sources to confirm it's safe before you try anything. At times like these, when there's so much risk and uncertainty, it's probably best to slow down and think carefully about anything you do. Don't let anyone pressure you into making a decision that involves your funds. The pain of missing out on some gains will be much less than the pain of losing everything to a scam or silly mistake. 

Whatever you choose to do or not do around the Merge and EthPoW fork, I hope you have fun. 

The Merge will go down as a massive technical achievement and a landmark moment in Ethereum's history -- one that has been many years in the making. It's going to be very exciting to finally see it happen. 

If EthPoW happens, it will be fascinating and exciting for entirely different reasons. The on-chain calamity that follows will likely make Luna's collapse look tame, and it will teach us a lot about how to build better and more resilient on-chain apps. The next few days should be very interesting indeed.

The Merge is actually the second step in a three-step plan to transition Ethereum from Proof of Work (PoW) to Proof of Stake (PoS). This multi-part plan was devised by Ethereum's developers, who felt it would simplify and de-risk the process.

The first step was launching an entirely separate blockchain called the Beacon Chain, which pretty much only does PoS. The Beacon Chain launched in December 2020, and it has run happily alongside the main Ethereum blockchain since then.

The Beacon Chain is as stripped back as a blockchain can be, containing only the essentials to perform PoS. Unlike the main chain, there are no transactions, no tokens, and no applications. In fact, the Beacon Chain is so simple that it only accepts ETH to stake, it doesn't allow withdrawals.

This simplicity is intended to make step two easier and safe

Step two is merging the existing Ethereum blockchain into the Beacon Chain -- hence the name the Merge. When the Merge happens, PoW will stop on the main chain and the Beacon Chain's PoS will take over.

The third and final step will be allowing stakers to withdraw their staked ETH from the Beacon Chain. This will require another update and isn't expected to happen for 6-12 months after the Merge.

How Will Everyone Know When To Merge?

Blockchains require everyone in the network to agree on what's happening. Therefore, it's important that everyone expects the Merge to occur at the same time. If they didn't, chaos would quickly emerge as everyone would disagree on which blocks were valid.

Normally, blockchains are updated at a certain block height. For example, everyone might agree that the chain's rules will change when block 1000 is produced. But, for security reasons, things will be a little different for the Merge.

Instead of taking place at a specific block height, the Merge will be triggered by something called Terminal Total Difficulty (TTD). That should make it more difficult for miners to attack or manipulate the process.

TTD comes from something called difficulty in PoW. This is a measure of how difficult it is for miners to win the PoW guessing game.

When we looked at PoW in part one, we saw that the miner with the most computing power stood the best chance of winning. That's because they can make faster guesses than anyone else, and are more likely to stumble upon a correct answer as a result.

But, what if every miner increased their computing power? Well, the number of guesses made would increase, so you'd expect a winner to be found in less time. And, that's exactly what happens. As more computers are used for mining, blocks are produced more frequently. Similarly, if fewer computers are used, blocks are produced more slowly.

Ideally, a blockchain should produce blocks on a regular cadence. And that is why difficulty was invented. If blocks are produced too quickly or too slowly, difficulty is automatically adjusted to put them back on schedule. In real terms, it's a change to the target that miners aim for in their guessing game. For example, if blocks are being produced too quickly, difficulty is increased -- meaning the target is moved downwards so the game is more difficult to win.

Total Difficulty is the number you'd get if you added up the difficulty in every single block in the chain. And Terminal Total Difficulty is the Total Difficulty at which the Merge will occur. Total Difficulty will not increase beyond that point because difficulty doesn't exist in PoS.

Once a block comes in and pushes Total Difficulty beyond the TTD, everyone will know it's time to Merge. Specifically, TTD is set to be 58,750,000,000,000,000,000,000, which should be hit on September 15th.

That date could move. It's entirely dependent on the number of miners still working on Ethereum and the rate at which blocks are produced. If a lot of miners decide to move on to other things before the Merge, blocks will slow down and it will take longer to reach TTD.

What Happens Next?

Stakers on the Beacon Chain have been producing empty blocks since the chain launched in 2020. That will finally end once the PoW chain reaches TTD.

To understand what happens next, we need a little more background on how Ethereum works.

Everyone who wants to be part of a blockchain network must run a piece of software called a client, which knows all the rules of the chain and how to talk to others in the network. Because the main Ethereum chain and the Beacon Chain are separate blockchains, people would need a different client for each one.

Beacon Chain clients are called consensus clients because the Beacon Chain is also known as the consensus layer. Meanwhile, main-chain clients are called execution clients, with the PoW chain known as the execution layer.

Pre-Merge, miners use their execution layer clients to put together blocks full of transactions. They then use it to play the PoW game and release their block if they win. Similarly, stakers use their consensus layer clients to put together their largely empty blocks and to do other activities like voting on valid blocks.

You might expect execution layer clients to become useless after the Merge. After all, they support a chain that won't really exist anymore. But, Ethereum's developers thought it would be easier and safer to keep using the existing software in the new world. After all, why spend huge amounts of time and money redeveloping something that works perfectly well?

The consensus layer client will also stick around after the Merge. So, stakers will need to run both a consensus layer client for the Beacon Chain and an execution layer client for the PoW chain.

When the Merge happens, stakers will put together a block full of transactions using the execution layer client -- just as miners did up to that point. Then, instead of doing PoW, they stuff the block inside their otherwise empty Beacon Chain block put together using their consensus layer client. They can then release the entire two-block combo as a package.

That is how Ethereum will operate from the Merge onwards. The first staker selected after TTD is reached will know this is how they should produce a block. Similarly, everyone else will know to expect one of the new-format blocks, and so they'll accept it when it arrives.

Unless something crazy and unexpected happens, the transition to full PoS should be pretty smooth -- but we'll talk more about that later.

What About Withdrawing Staked ETH?

Earlier, I mentioned that the Beacon Chain only accepts ETH deposits to stake, it doesn't allow withdrawals. That won't change at the time of the Merge. Users will still be able to transfer ETH to the consensus layer to stake, but they won't be able to withdraw back to the execution layer. Additionally, any ETH created on the consensus layer to reward stakers will be stuck there until withdrawals are enabled.

It's worth noting that only ETH on the Beacon Chain/consensus layer will be frozen. Any ETH on the PoW chain/execution layer will remain liquid. That means that stakers will actually have access to a portion of their rewards.

Remember that staking rewards come in three parts: newly issued ETH, a portion of transaction fees, and MEV. The newly issued ETH is the only portion that lives on the consensus layer. Fees and MEV must live on the execution layer because they're coming from the transactions taking place on the execution layer. So, stakers will have access to some of their rewards, but they'll have to wait to gain access to the rest.

At some point in the future, probably 6-12 months after the Merge, Ethereum will undergo another update called Shanghai which will unlock staked ETH. From that point on, stakers will have complete freedom to withdraw some or all of their ETH from the consensus layer.

What's important about this -- from a price perspective -- is that no new ETH can hit the market until that upgrade happens. As a result, the Merge could lead to a sudden and very dramatic shift in sell pressure. In the blink of an eye, we'll move from a world in which miners are practically forced to sell ETH to cover costs, to a world in which stakers can't sell their rewards if they want to. That might result in price appreciation in the weeks and months after the Merge -- so it's another reason for Ethereans to be excited about it.

Of course, markets should price in the possibility of massive sell pressure once the ETH is unlocked. That will put a dampener on things -- especially as markets tend to dislike uncertainty, which is all we have about Shanghai right now.

As a result, I don't know what to expect price-wise. But, I'm certainly intrigued to see how these opposing ideas and market forces will work themselves out in the months to come.

Can Anything Go Wrong?

The Merge certainly carries some risks. After all, it is a huge change to the way Ethereum operates. But, it’s been tested extremely thoroughly for months up to this point, and it wouldn’t be happening if developers thought there was any realistic chance of failure.

I wouldn’t be surprised to see a bit of instability immediately after the Merge. For example, there will surely be some stakers who haven’t properly prepared themselves for the event, and they may be knocked offline until they sort themselves out. However, I don’t see that happening on a large enough scale to cause real problems.

Ethereum’s PoS will work exactly as intended until more than 1/3 of stakers go offline. At that point, it will stop reaching finality. That doesn’t mean the chain will stop, it just means the most recent portion of the chain isn't firmly locked in place and could change.

That sounds bad, but it wouldn’t necessarily be cause for concern. After all, Ethereum doesn’t reach finality under PoW and there aren’t problems. Chances are, things would continue almost as usual even if more than 1/3 of stakers went offline. But, there is a slim possibility of more severe issues. For example, blocks might be produced and then immediately replaced with alternatives. That kind of instability would make the blockchain effectively unusable until the issue was resolved.

Something major would have to happen to knock 1/3 of stakers offline at the same time. The most likely scenario would be a bug in one or more of the clients that stop them from operating as expected.

Ethereum has tried to reduce this risk as much as possible by using multiple, independent implementations of each client. For example, 4 different teams have released their own version of the consensus layer client. Similarly, there are multiple implementations of the execution layer client. All of these different clients work together in a mix-and-match way, so a bug affecting any particular pairing shouldn't take too many validators offline.

Ethereans have also made a big push for client diversity to reduce this risk even further. The effort has been particularly successful on the consensus layer. Of the 4 clients, none stand out as especially dominant or overly used. The same can't be said for execution layer clients, with an implementation called Geth standing head and shoulders above the rest in terms of usage. That makes Geth the main source of risk heading into the Merge.

As long as Geth is OK, at least two other implementations would need to run into issues to put 1/3 of validators at risk. Given the sheer amount of testing that has taken place in the months leading up to the Merge, that doesn't seem likely. By now, every major bug should have been caught and eliminated. Recent tests and dress rehearsals for the Merge have only experienced minor issues from weird edge cases, all of which have also been accounted for. Realistically, it would take something especially strange and unexpected to cause a problem today.

And then, even if a large number of validators were taken offline, they would all face a massive incentive to get up and running again.

Ethereum would interpret the sudden, unexpected dropoff in validators as an attack. Every offline validator would face an economic penalty proportional to the number of offline validators. As a result, validators would scramble to fix their problems and get back online as quickly as possible, returning Ethereum to a healthy state.

Overall, then, the most likely scenario is that a handful of validators experience minor problems. They might go temporarily offline, but the network would be unaffected. The chance of anything more severe happening is low. And, if anything bad did happen, the recovery time would probably be short. That certainly wouldn't be ideal, but it wouldn't be apocalyptic either.

Altogether, the chance of the Merge failing is practically 0. Unless I just jinxed it.

So that’s how the Merge will work. To see what you need to do to prepare for it, check out part four.

In part one, we started exploring the Merge and saw that it will be a massive -- and fairly high risk -- change to Ethereum. That raises a question: if the Merge is so complicated and risky, then why bother? After all, Ethereum seems to be working perfectly well today.

So, here, we will look at why Ethereum has decided to make the switch to Proof of Stake. And, not only will we look at the potential benefits, we'll evaluate the risks as well.

The Benefits of PoS

Ethereans believe that Proof of Stake (PoS) improves upon Proof of Work (PoW) in numerous ways. They'd argue that it brings sizeable environmental and economic benefits to the blockchain, while also fitting Ethereum's culture and ideology better than PoW.

Environmental Benefits

The environmental advantages are probably talked about the most.

PoW has earned itself an exceptionally bad reputation for having extreme energy use and high carbon emissions. And, while some of the claims against it are inaccurate or exaggerated, it's difficult to argue that reputation is unwarranted.

In part one, we saw that PoW incentivises miners to accumulate computing power. The more computing power they can direct towards PoW, the more likely they are to win. As a result, miners will keep adding computers to their setup until it stops being profitable to add any more. Over time, this has transformed mining from an accessible, home-based hobby into an expensive, highly professional business. Today, many miners use warehouses full of hyper-specialised computers called ASICs (Application-Specific Integrated Circuit). Those setups require masses of electricity to run.

Now, mining proponents will point out that high electricity usage doesn’t necessarily mean high emissions. Nor does it mean that mining is evil or wasteful.

Historically, miners have made use of overproduced or stranded energy that would otherwise be wasted. Increasingly, miners rely on renewable energy or use carbon offsets to minimise their environmental impact. And, there are even very reasonable arguments that mining can aid the transition to a predominantly renewable-powered world.

Even so, mining clearly does use a lot of electricity and has a sizeable carbon footprint. For many, that is unforgivable and entirely negates any potential benefits. It's also terrible PR. PoW is pretty esoteric, and arguments in its favour are technical and complex. As a result, PoW -- and cryptoassets in general -- are perceived to be a major waste of energy and contributor to global warming. That's not good for adoption.

By swapping to PoS, Ethereum can sidestep the entire environmental debate around PoW. While Bitcoiners try to explain complex counter-arguments to people who don't want to listen, Ethereans will be able to nod and say the Merge cut energy use by 99.95%. It's certainly an easier approach.

So, it's good from a marketing perspective. It will remove one of the barriers that slow adoption. It may also enable investment from funds that have certain ESG commitments. And, it will satisfy the many climate-conscious Ethereans that don't buy into the pro-PoW arguments, so it's a better cultural fit.

Economic Benefits

Some would argue that the environmental benefits alone would be enough to justify the Merge, but that is far from the only positive impact of PoS. The second major benefit is economic.

PoS is generally believed to provide more cost-efficient security than PoW. By this, I mean the cost of successfully attacking a blockchain will increase by a larger amount for every dollar paid to block producers under PoS than PoW.

Intuitively, that makes sense. With its specialised computers and insatiable appetite for electricity, PoW comes with high costs that must be more than offset by the rewards on offer. Meanwhile, staking requires no specialised equipment and has minimal ongoing costs. That means it remains profitable and attractive even if rewards are low.

As a result, Ethereum can safely slash ETH issuance after the Merge by paying stakers less than it pays miners.

Under PoW, Ethereum creates about 13,000 ETH per day to pay miners. That will fall to about 1600 ETH per day immediately after the Merge -- around 87% less. Issuance will increase if more stakers come online, but we'd still be talking about maybe 4000-5000 ETH per day in a reasonable worst-case scenario -- still a better than 50% reduction.

Now, it is worth noting that miners don't act as a constant source of sell pressure. The idea that they immediately sell most of their freshly printed ETH is a complete misconception. Instead, on-chain data suggests miners tend to exacerbate market conditions by hoarding in bull markets and selling in bear markets. Therefore, the reduction in issuance may not protect ETH holders from dilution in the way that many expect.

Still, significantly reducing ETH issuance should have a positive impact on price. At the end of the day, less ETH will be printed and put into the hands of people who must eventually sell to cover costs. And, if miners were prone to selling when the market was at its weakest, the shift to PoS may reduce ETH's downside volatility.

So, the reduction in issuance alone should be good for the price of Ether. But there's more -- a cherry on the cake. Last year, Ethereum received an upgrade called EIP-1559. This changed the way that transaction fees worked, burning the majority of the fee rather than handing it to block producers. This has the effect of further reducing ETH issuance, potentially taking it negative in the right conditions.

The higher transaction fees rise, the more ETH will be burned. The exact gas price required for deflationary Ether depends on the number of stakers. As things stand, any price above about 15 Gwei would see more ETH destroyed than created in each block. A few months ago, that would have looked like an absolute certainty. However, the bear market has brought less activity and lower transaction fees. Based on averages over the past month or so, it looks like the burn will just about match issuance after the Merge.

Whatever happens, the shift to PoS means that a greater portion of issuance will be burned compared to PoW, further reducing Ether's inflation rate. Essentially, it accentuates the core economic benefit of the Merge and makes ETH an even more attractive asset.

Security Benefits

We've already touched on PoS's cost-efficient security, but there's another advantage on top of this. It also enables a more useful and targeted response to attacks.

If someone accumulated enough computing power to attack a PoW chain, the only response would be changing the hash function used for mining. That would make the attacker's ASICs useless, but with massive collateral damage. Every honest miner's ASICs would also become useless after the change. Miners would need to migrate first to GPUs, and then to new ASICs once they were developed for the new hash function. That means the solution to the attack might be more damaging than the attack itself.

Meanwhile, under PoS, the response could be focused specifically on the attacker. Most of the time, the attacker's funds would be slashed as soon as they broke the blockchain's rules. If the attack was more difficult to detect or somehow avoided automatic slashing, a special upgrade could be released to have the same effect. Either way, the attacker would suffer the severe economic penalty alone.

State-Level Threat Protection

PoS doesn't just make blockchains more secure, it also gives stakers better protection from state-level threats compared to PoW.

The hardware and electricity requirements of mining mean it has a large and very visible physical footprint. Meanwhile, staking can be done discretely from almost any location.

If more countries acted like China and tried to ban mining, it wouldn't take much effort to find and shut down most mining facilities. Some smaller mining farms might survive, but the biggest and most important wouldn't stand a chance. The vast majority of mining power in a country could be wiped out with relatively little time and effort.

If the same country wanted to ban staking, they'd have a much harder time. Sure, some validators might be scared away. Others, especially staking pools run by major exchanges like Coinbase, would be easy to find and close. But it would be almost impossible to track down every at-home validator, even with a highly concerted effort.

In some worst-case, dystopian future, a PoS chain would likely be more effective and reliable than a PoW chain. That's a pretty minor benefit and hopefully, it won't be needed. But, good blockchains are built with these scenarios in mind, and if the worst does happen, it could be important.

Enhanced Decentralisation

PoS arguably promotes decentralisation better than PoW. However, this isn't as clear-cut as some suggest.

PoW suffers from a few centralisation vectors.

For example, very few firms are capable of manufacturing the ASICs used in mining. That gives those firms immense power in the industry.

PoW also advantages larger, industrial miners over hobbyists and enthusiasts. Professionals have more money to spend on bigger and more powerful setups. They can also establish connections with ASIC manufacturers and source deals for cheap electricity. All of this gives them a significant advantage over smaller miners and individuals. And that advantage compounds over time. The more they win, the more they earn. Eventually, mining becomes concentrated among a relatively small number of professionals.

PoS is fairer and more accessible -- at least in theory.

Staking doesn't require specialist equipment or low-cost electricity, so it can be done from most homes. Staking pools and derivatives, like those offered by Lido and especially Rocket Pool, make staking even more accessible. They allow people to stake without meeting the minimum capital requirements imposed by the blockchain. However, they can also become centralisation vectors of their own. Staking pools are likely to accumulate enough users and funds to become the dominant player in most PoS blockchains.

It's also worth noting that a blockchain won't be "decentralised" just because it uses PoS. It's very easy to build a PoS blockchain that makes "decentralised" at-home staking difficult, expensive, or practically impossible. The hardware requirements for validators on most high-throughput blockchains are astronomically high. Normal people using residential wifi simply wouldn't be able to keep up with the chain. So, as with PoW, block production would be limited to a small number of professionals.

To its credit, Ethereum has been carefully designed to ensure at-home staking is viable. So, it is at least possible for block production to become meaningfully more decentralised after the Merge. I'm extremely sceptical about it -- and we'll talk more about that later -- but I genuinely hope it happens.

Summary

So, those are the main benefits of the Merge.

It will radically reduce the energy use and carbon emissions associated with Ethereum. It will slash the cost of securing the network, enabling a major reduction in ETH issuance. It will give block producers better protection from state-level threats, while also improving Ethereum's defences against malicious block producers. And, it will (potentially) decentralise block production, giving more Ethereans than ever an opportunity to actively participate in the network's operation.

What Are The Downsides?

Of course, nothing can be all good. So, what are the main arguments against PoS?

Centralisation

A major concern around PoS is that it is in fact more centralising than PoW.

I know I just argued that it could be more decentralised, but there are good arguments on both sides and I want to cover them all as best I can.

The main risk is that stake accumulates almost entirely in staking pools and centralised exchanges. That would give those entities outsized influence over the network, and could even allow them to attack the chain if they wanted.

We've already seen that Ethereum has been designed to ensure individuals can stake from home, which arguably reduces this risk. But, I don't think it will. At the end of the day, however easy it might be to run a validator, it will always be easier, cheaper, and more convenient to let someone else do it. In my eyes, delegated staking through pools and exchanges will be the default option. Only a tiny number of the most enthusiastic Ethereans will care enough to run their own validators.

And, it's not just about the effort involved. Staking pools and exchanges may offer better rewards and higher returns than solo staking -- at least in the short term.

PoS doesn't suffer from the same economies of scale as PoW. However, it's still possible for the largest and best-resourced stakers to receive outsized rewards. This is because of something called MEV (Maximum Extractable Value), which is essentially "free" money that can be made by carefully selecting and ordering the transactions in a block.

MEV is a fascinating but fairly complicated topic that deserves its own deep dive, so I won't go into details today. What matters here is that MEV can provide an additional revenue stream to the stakers who know how to access it. That requires either specialist knowledge or access to others with that knowledge. And that benefits the largest stakers because they are in a position to hire or partner with MEV specialists to maximise their income.

Now, to be fair to Ethereum, efforts are already underway to democratise MEV at the protocol level. This would reduce the disparity between professional and at-home stakers. Those updates won't be available for some time, but a similar third-party solution by Flashbots will be ready in time for the Merge. Validators will need to know about and opt-in to using this tool, but it should still reduce the bias towards the biggest stakers. So, perhaps we can be optimistic that this issue will be eliminated in time.

Even if a PoS blockchain can avoid centralisation through staking pools and exchanges, it may still suffer in another area. Major cloud computing platforms like AWS could become crucial to the blockchain's operation.

Some validators will surely run their own hardware but, just like staking itself, it may be easier to outsource this effort. Many will perceive cloud computing platforms to be an easier, safer, and more reliable option than anything they could run themselves.

The danger of many validators relying on a handful of cloud computing platforms is that each platform becomes a major point of failure. If a standalone validator failed, nobody would notice and Ethereum would continue unaffected. But, if AWS went down and 40% of validators were using it, then it would be a major problem. And technical issues aren't the only thing to worry about. It isn't far-fetched to think that cloud providers could suddenly purge validators from their platforms -- after all, one has already banned anything blockchain related.

Ethereum's PoS has been designed to discourage the use of things like AWS. If a cloud provider took a large number of validators offline, Ethereum would interpret that as an attack and economically penalise those validators. Therefore, it's smarter and safer for validators to avoid anything that could coordinate failures. But it remains to be seen if that incentive is enough.

Less Censorship Resistant

The possibility of centralisation increases the risk of something else: censorship. This has become a big talking point in recent weeks, and it's another topic that really deserves its own deep dive.

The idea is that staking pools and exchanges will be forced to comply with government sanctions. That might mean ignoring transactions from sanctioned addresses. It might even mean ignoring transactions from addresses indirectly related to sanctioned addresses. In the worst case, it would mean ignoring or rejecting blocks that contained those transactions.

That would be ideologically disastrous for Ethereum. Blockchains are designed to be neutral, accessible to all, and censorship-resistant. They are supposed to guarantee people's rights and freedoms, acting as a payment solution of last resort for marginalised groups. A censorship-embracing version of Ethereum would be seen by many as a perversion of something great.

And, there are more than ideological arguments against this. Perhaps you don't care about potential censorship. Perhaps you think it's a good thing. Those are completely valid opinions. But, you should still view this as a major risk. That's because the most extreme forms of censorship would likely lead to Ethereum fracturing into an array of regional networks. Block producers would be accepting or rejecting different blocks based on their government's guidelines and sanction lists. That would result in a vast array of different blockchain histories, each considered canonical by small groups of regional block producers. The idea of a single, global Ethereum network would be dead.

All things considered, this is probably the greatest threat to PoS blockchains.

Potential solutions have been discussed.

For example, Ethereans could react to censorship with something called social slashing. This would entail making a special rule change to reject blocks proposed by the censoring parties. Ethereum would then perceive those block producers to be inactive and penalise them. The validators would be forced to unstake their ETH or watch as it was whittled away with economic penalties. However, this approach has some major drawbacks. Chief among them is the contradiction of censoring the censors. Surely social slashing would also undermine confidence in Ethereum's neutrality and censorship resistance.

Luckily there are better options available. However, these require changes to the way Ethereum works and they likely won't be available for some time.

The good news is that censorship is unlikely to be as much of an issue as some suggest.

The influence of staking pools and major exchanges is certainly dangerous. Exchanges are at particular risk of caving to government pressure, and there's no equivalent for that under PoW. But the threat of social slashing, combined with the fact that rigorous and widespread censorship just isn’t practical or easy to implement, make anything close to the worst-case censorship scenarios extremely unlikely.

We may see weaker forms of censorship in the short term -- the kind where certain transactions are simply ignored by certain block producers. But that threat isn't new or unique to PoS, it can happen under PoW as well.

So, while PoS may be a little less censorship resistant than PoW, it probably (hopefully) doesn’t matter a whole lot.

Complexity

While PoS is conceptually simpler than PoW, it's much more difficult to design and implement an effective PoS algorithm.

PoS tends to require a greater quantity of more complicated code than PoW. That means more opportunities for bugs to creep in, and a larger surface area to attack. For this reason, some view PoS as less trustworthy and reliable than PoW.

Encourages Hoarding

The counterpoint to PoS's economic benefits is that it prevents a healthy distribution of coins by encouraging hoarding. Stakers are essentially paid not to sell, and their low running costs give them little reason to either. This is in complete contrast to PoW, where the high cost of mining compels miners to divest their holdings. Miners can also sell coins to reinvest in new equipment to increase future returns, increasing that incentive to sell.

We've seen that this dynamic can be good for the price of a PoS asset, and that will keep existing holders happy. But it won't be so good for newcomers looking to acquire their first coins. Over time, it's likely to create an unhealthy and extremely uneven distribution of coins, where wealth concentrates among a small group of early supporters. If Ethereum's fee burning does kick up a gear and ETH becomes deflationary, the effect could be particularly pronounced.

It's difficult to say how serious this issue could be. For cryptoassets that resemble shares in a company more than money, it's arguably not so bad. People rarely complain about a handful of individuals owning most of a company, after all. But, Ether is often promoted as a money. And, a money that is overwhelmingly owned by a tiny group of people doesn't seem particularly attractive. Even if ETH's 'money-ness' was limited to being a simple store of value, an immense concentration of wealth still wouldn't look good.

Ultimately, PoS's economic benefits may well be undermined by the hoarding culture it could create. The incentive to hold, combined with the lack of forced selling and fee burning may be detrimental to Ether's desirability.

Weak Subjectivity

There are a few arguments made against PoS that are, in my opinion, quite weak. However, they're brought up frequently, so it makes sense to cover them. The first of these is that PoS requires something called weak subjectivity.

Weak subjectivity means that users require outside information from a trusted source to ensure they are following the correct version of a blockchain.

If a user was presented with multiple conflicting versions of a PoS chain, they would select the "official" version by counting the number of historic votes on each chain. But they can't know if those votes are entirely legitimate. There's a chance they were cast by malicious validators who are no longer staking on the real blockchain. As a result, the user could be tricked into following an incorrect version of the chain. The solution is to create weak subjectivity checkpoints, which are like waypoints that everyone in the network agrees are valid. Taking these checkpoints in addition to the blockchain data they downloaded, the user would be able to determine the canonical chain. However, they would need to trust their source for these checkpoints.

PoW doesn't suffer from weak subjectivity, so these checkpoints aren't necessary. Miners can't cheat in the PoW guessing game, so they can't create fake votes on a false chain. When presented with multiple conflicting PoW chains, it will always be safe to select the one with the greatest total PoW. Therefore, PoW requires fewer trust assumptions than PoS.

PoS's proponents argue that the additional trust assumptions are minimal. After all, it's not difficult to verify a checkpoint with a few independent sources. Additionally, all blockchains -- including PoW chains -- already require similar trust assumptions. For example, most users trust the developers behind the blockchain software to act honestly.

I can see why a tiny group of purists and trust minimalists would object to weak subjectivity. But, for the vast majority of normal people, it's probably nothing to worry about.

Nothing At Stake

The nothing-at-stake problem is the other major criticism of PoS that is often repeated but doesn't really hold up. It's fair to say that it was a fundamental problem with early, naive attempts at PoS, but it's been solved for a while. In fact, genuine issues like PoS's complexity are a side-effect of solving this very problem.

Nothing-at-stake stems from the fact that staking isn't grounded in the real world like PoW.

With PoW, miners must allocate real resources to their efforts; it has real-world costs. If a miner is presented with multiple, conflicting versions of the chain, the rational thing to do is to mine only on the version they believe is valid. Mining on the invalid chain would be pointless, given it would almost certainly yield no reward but still require real-world resources.

Conversely, staking is not associated with any real-world costs. Staked coins exist entirely within the blockchain they secure. Therefore, if that chain was replicated across multiple competing versions, the coins would exist on all of them. As a result, a rational validator would attempt to produce blocks on every version of the chain they came across. In that case, they increase their chance of winning while risking nothing. There is nothing at stake to discourage them. And, that's a problem. Validators working across every branch they find would make a PoS chain easier and cheaper to attack. It would undermine the blockchain's security.

The solution to the nothing-at-stake problem is to make it extremely costly to stake on multiple versions of the chain. This is where slashing comes in. If someone submits evidence of a validator doing this, some portion of that validator's funds will be destroyed. Now there is something at stake, and validators' incentives are re-aligned with the blockchain.

Summary

Despite the nothing-at-stake problem being resolved with slashing, it's not uncommon to hear PoW advocates mention it as a major flaw in PoS's design.

Perhaps that's because the lack of real-world costs makes PoS feel like it's making something from nothing. Perhaps it's because it feels like PoS relies on an empty, circular logic of a blockchain being secured by its own native asset. Or, perhaps it's something else entirely.

Whatever the reason, any arguments about PoS being fundamentally broken are almost certainly wrong. Modern PoS systems have solved the issues that plagued early attempts. These days, the fundamental problems have been entirely resolved or reduced to relatively minor tradeoffs. The issues that remain are the ones we've examined today.

The Merge will bring many benefits to Ethereum, but it also brings new risks.

It may increase centralisation and therefore censorship. It adds complexity to Ethereum's code, increasing the chance of bugs. It could skew Ethereum's economics too heavily in favour of existing holders. And, for those who want to reduce trust to an absolute minimum, it introduces weak subjectivity to the blockchain.

Didn’t You Forget Something?

A lot has been said about the Merge over the past few months, and not all of it has been accurate. Depending on what you've heard and who you've listened to, you might be thinking I've missed something important. So, let's review some of the popular misconceptions about the Merge.

Staking Will Produce High Yields

Many Ethereans have claimed that the Merge will transform ETH into an ultra-attractive yield-bearing asset.

The argument is that after the Merge, everyone will be able to stake their ETH to earn generous real yield while experiencing minimal risk. That means they will earn returns well above Ether's inflation rate. In the most optimistic projections, stakers might earn double-digit yields while Ether's supply shrinks. Recent estimates tend to be more tepid, but still estimate yields of 5% or 6% against a roughly 0.5% rate of inflation. That's still pretty good. But, it's also not very realistic. In my opinion, this aspect of the Merge has probably been overhyped.

If staking rewards really are that generous -- and they may well be in the immediate aftermath of the Merge -- then many more stakers will come online to try and earn them. Not only would that dilute yields, but it would also increase Ether's inflation rate as more ETH would be minted to pay validators. Therefore, nominal yields would fall, and real yields would fall by an even greater amount!

At the end of the day, eye-poppingly high yields just aren't sustainable. Eventually, yields should settle at whatever value that the market feels is sufficient compensation for the risk and effort of staking. If most people perceive staking to be almost risk-free, then that won't be a large number. I struggle to see staking rewards exceeding 1% or 2% in the long run.

And that's not all. Staking yields will come from three sources: ETH issuance; the portion of transaction fees paid to block producers; and whatever MEV the block producer can extract.

ETH issuance is given to every validator that does their job properly. That means it is by far the most predictable portion of staking rewards. It also means it's more like a penalty against non-stakers than a reward for stakers. You don't really gain anything from it, you just don't lose.

Transaction fees and MEV will vary wildly from block to block. And, I suspect many are overestimating how much they could earn from them. Simply averaging total fees and MEV over the number of stakers will give an over-optimistic yield projection that most stakers will never earn.

There are two main reasons for this. First, in any given time period, many stakers won't get an opportunity to propose a block. Therefore, they won't get an opportunity to earn these rewards.

Second, the stakers that do get to propose blocks aren't guaranteed to receive anything close to the 'average' fees and MEV from them. Looking historically, a large portion of total MEV and fees are captured in a small portion of blocks. And, that makes sense. Moments of extremely profitable on-chain activity don't happen very often. The chance of a given validator proposing a block on one of those occasions is pretty low. Therefore, most of the time, earnings from fees and MEV will be substantially less than the averages suggest. As a result, many stakers could be left disappointed with their earnings.

Overall, I think this is a case of the truth being stretched a little too thin. Ethereum stakers will earn yield, and sometimes it might be quite generous. But high yields won't be long-lasting or widespread. This isn't a game changer that will turn heads in the world of traditional finance. It's just another, relatively minor benefit of the Merge.

The Merge Will Reduce Fees

The worst case of misinformation around the Merge is probably the idea that it will reduce Ethereum's transaction fees. It won't do that.

This myth may come from the fact that Ethereum will produce blocks slightly faster after the Merge. Under PoW, Ethereum produces a block about once every 13 seconds. Under PoS, it can produce a block every 12 seconds. So, technically, Ethereum's capacity will increase. But, it's a negligible change that will have no perceptible effect on fees.

For those that are disappointed by this, it's worth noting that Ethereum has an entirely separate set of plans for scaling and making transactions more affordable. Most of those plans revolve around layer 2 platforms like Optimism, Arbitrum, and zkSync -- which are all useable today. There will also be a number of future updates focused on scalability. Unfortunately, the Merge is not one of them.

So, Is It Worth It?

For me, the Merge does seem like a worthwhile and beneficial upgrade. However, I'm not as excited about it as others seem to be.

The environmental benefits are certainly nice to have. Even accounting for the potential benefits, it is difficult to justify PoW's energy consumption when PoS does effectively the same thing more efficiently.

However, I'm sceptical that the Merge will do much to change opinions and end criticism of Ethereum.

I suspect many of the loudest critics of crypto's energy use don't actually care about energy use. Instead, they just dislike cryptoassets and are looking for a stick to bash them with. After the Merge, they'll either find something new to complain about or will just keep talking about energy use anyway. After all, facts don't matter when you hate something that much.

Wider audiences probably don't care about energy use either. Maybe I'm overly cynical, but I think most people either don't care at all or don't care enough to avoid Ethereum if they had a compelling reason to use it. Much of the talk online is just people saying what they feel social pressure to say.

For that reason, I don't consider the environmental benefits of the Merge to be a game-changer in the way that some suggest. I don't think it will unleash a flood of new, climate-conscious users because those users don't really exist. Don't get me wrong, this isn't a bad thing. It can't hurt Ethereum to respond to and remove one of the most frequently cited criticisms against it. But, I struggle to see it making the difference that many are hoping for.

The economic benefits are more interesting.

The significant reduction in ETH issuance should help it compete against Bitcoin as a gold-like store of value. That's especially true once you account for the possibility of deflationary days thanks to burned transaction fees. With this tightening of supply, it's easy to see why so many people are bullish on ETH over the medium- and long-term.

Still, I think criticisms of this model are valid. It won't be a good look if Ethereum's wealth is concentrated among a tiny number of stakers. It's also worth questioning if Bitcoin's 'hard money' narrative actually makes sense for Ethereum. Are people more likely to build on or use Ethereum because of it, or could it even put them off?

I'm interested to see how this one plays out. In all likelihood, I'm overthinking things and it won't make much difference either way. But, I can't help but worry that post-Merge economics favour existing ETH holders a bit too much.

The risk of centralisation is my biggest concern by far.

While I can see how staking could further decentralise control of the network, I don't see that as a likely outcome. In a few years, I fear a handful of exchanges and staking pools will utterly dominate the staking landscape. After all, they already control a significant portion of staked ETH today -- when you'd expect solo staking to be near its peak. The question then becomes, what will they do with their immense influence?

Probably not that much, all things considered. I've already said I don't expect to see worst-case censorship. Weaker censorship is certainly possible, but won't be drastically worse than what could happen under PoW. Plus, Ethereum should make changes to eliminate that risk in the longer term. There's also no risk of stakers corrupting governance and forcing through unwanted changes because Ethereum doesn't use on-chain governance.

The bigger risk is that centralisation makes Ethereum less reliable and resilient. If 95% of validators were run by 3 entities, the entire network would feel the effects of one of them going offline. That's a problem.

Additionally, it would just be sad to see Ethereum captured in that way. Outside of staking, Ethereum has been painstakingly designed to enable maximum decentralisation. A big part of Ethereum's culture is about promoting decentralisation. It has the feeling of a "by the people, for the people" project. Anything less than decentralised block production would feel like a failure. And yet, it seems inevitable.

I really hope I'm wrong on this. I hope something happens to promote solo staking. But, I struggle to see a world in which a large number of people choose to run their own validators instead of leaving that to someone else. That may not compromise Ethereum or leave it at risk of censorship. But, it would feel like a massive and rather disappointing underachievement.

Altogether, there are certainly question marks and minor concerns around Ethereum's shift to PoS, but nothing about it appears debilitating. At the same time, it should bring a swath of small benefits. Ethereum's security, economics, and public image should all improve after the Merge. And, if nothing else, the Merge clears the way for a number of other, more exciting upgrades down the line.

To me, the Merge is predominantly an incredible technical achievement. It just happens to come with these minor benefits and the potential to pump ETH's price. I understand the excitement of others, I just don't think it's entirely warranted.

So, that’s what the Merge will do. To find out how the Merge will work, check out part three.

The Merge will be Ethereum’s biggest ever upgrade. It may also be the most significant and highly anticipated event in the history of cryptoassets. Yet, despite that, the Merge is poorly understood.

So, in this series, I will take a beginner-friendly look at what the Merge is, what it means for Ethereum, and what you need to do to prepare for it.

Let's start by understanding what the Merge is.

What Is The Merge

The Merge is the name of the process that will transition Ethereum from Proof of Work to Proof of Stake.

What Does That Mean?

That probably doesn’t mean much to most people, so let’s break it down a bit more.

This is all about the fundamentals of how the Ethereum blockchain works.

Blockchains don't have any kind of leaders or authority figures by design. That means there is no one to define and update the "official" history of the chain and its transactions. Instead, that responsibility is shared equally across the network; every participant maintains their own, individual record of events. But a blockchain wouldn't be useful if it were just a loose collection of people doing their own thing. So, a blockchain needs something to keep its members in sync and aligned around the same history.

This is where things like Proof of Work and Proof of Stake come in.

You can think of them as different kinds of lottery mechanisms that elect temporary leaders for the network. Winners get the opportunity to propose a block of transactions to everybody else. Everyone then checks if the block is valid according to the blockchain's rules and adds it as the latest entry in their record of events if it is. The block producer receives a financial reward for doing a good job, and the network remains in sync as it progresses.

How Do These Lotteries Work?

The Proof of Work (PoW) lottery is effectively a guessing game with added math.

Participants in the game are called miners. Their job is to guess a number, plug it into a mathematical function, and calculate the result. If that number is smaller than a target set by the blockchain, the miner wins. If it's larger, they discard their result and try again, using a different number at the start. The game will continue until a winner emerges, and there is no limit to how many attempts a miner can make.

On the surface, this sounds easy. But, there are a few complications. For example, the mathematical functions used in PoW are hashing functions, which have some special properties. The most important of these is that they deterministically produce unpredictable gibberish. By this, I mean a given input will always produce the same output, but that output will look random and unpredictable, following no obvious pattern. It's impossible to know what a hash function will spit out until the calculation is complete. It's also impossible to work backwards from a desired answer. So, miners have no choice but to play the game properly. They must keep guessing and calculating until they, or someone else, stumble upon a successful solution.

The miner with the best chance of winning is the one who can calculate hashes fastest. They will be able to make more guesses than anyone else and are therefore more likely to find a winning solution. As better and more powerful computers can make faster calculations, PoW incentivises miners to accumulate as much computing power as possible. A given miner's chance of winning will be proportional to their share of all miners' computing power.

The Proof of Stake (PoS) lottery is closer to what you might expect from a lottery system.

Participants, known as stakers or validators, must lock (stake) their funds in a special staking contract. The more they stake, the more likely they are to win. An algorithm is used to periodically select a winner from the pool of validators, and every validator remains in play until they either misbehave or choose to unstake their funds.

All of that is generally true, but different PoS systems can vary quite significantly. For example, some threaten to destroy (slash) the staked funds of any validator who misbehaves. Some require validators to constantly vote for blocks they believe are valid. And some allow users to delegate their stake to others, who will produce blocks on their behalf.

Are PoW & PoS Consensus Mechanisms?

PoW and PoS are often called Consensus Mechanisms. And, that name makes sense -- after all, they are used to help everyone in the blockchain come to a consensus about the order of events. However, technically they aren't consensus mechanisms.

If you want to be accurate, you can say they are Sybil resistance mechanisms. A true consensus mechanism pairs a Sybil resistance mechanism with some rule to help choose between conflicting versions of a blockchain. For example, both Bitcoin and pre-Merge Ethereum use a consensus mechanism called ‘Nakamoto Consensus’. This combines the PoW lottery system with a rule that effectively says "the longest chain is the official one".

Still, for simplicity — and because everyone else does it — we’ll keep referring to PoW and PoS as consensus mechanisms.

Do They Do Anything Else?

Hopefully, it’s already clear that these consensus mechanisms are essential to maintaining a functional and orderly blockchain. Without them keeping everyone aligned, things would quickly fracture and fall apart. But, it’s probably not obvious that they are crucial to a blockchain's security.

If it was easy to manipulate the consensus mechanism, an attacker could take over a blockchain by repeatedly winning the right to produce new blocks. It would be like turning on god mode. The attacker would have the power to enforce censorship against specific users, and they might even be able to alter the blockchain's history to undo previous transactions.

Now, nothing is infinitely secure. No consensus mechanism can perfectly protect a blockchain. But, they can — and should — make it extremely difficult and expensive to attack.

This isn't always the case. Some blockchains, including relatively valuable ones like Ethereum Classic, have been attacked multiple times in the past. It's actually surprising it doesn't happen more often. Perhaps it's because most blockchains just aren't valuable or notable enough to make good targets. But a successful attack on something as significant as Bitcoin or Ethereum could be devastating, and the perpetrator could make a lot of money. As a result, it's reasonable to assume that these chains are under constant threat, and any weakness will eventually be exploited.

How Does The Merge Fit Into This?

I mention all this to highlight just how important a consensus mechanism is. It's not just a functional tool to choose block producers, it's a blockchain's protection against a dangerous world. It would be a big deal to suddenly disrupt and change it. But, that's exactly what the Merge will do as it doing as it swaps Ethereum's current PoW for a new PoS mechanism.

If you've already heard people talking about the Merge, you've probably heard a few analogies for it. The most popular is that the Merge is like changing a car's engine while it's driving. I like that comparison, but I think it can be taken a step further.

We've seen that a consensus mechanism is a bit like an engine that keeps the blockchain chugging along. But, we've also seen that it's like armour around the chain, protecting it from attack. Therefore, you could say the Merge is like a tank or armoured vehicle changing both its engine and armour, all without stopping while patrolling enemy territory.

It’s a massive engineering challenge, fraught with danger and complexity, and no one has done anything like it before.

What's more, the Merge is the result of an entirely decentralised governance and development process. It is the culmination of 6 years of work by countless individuals distributed all over the world. Despite working for a variety of organisations, each with their own agendas and ways of working, and despite lacking a clear leader who could force changes through, they have successfully collaborated to make the Merge a reality.

On top of that, a successful Merge will require the coordination and cooperation of thousands of people making up the Ethereum network.

Therefore, this update will be more than a massive technical achievement, it will be a triumph of human collaboration. If all goes well, then Ethereum really will be making history with The Merge.

So, that's the Merge. Ethereum's shift from PoW to PoS.

But, why has Ethereum gone through all this risk and effort? What does it stand to gain from the Merge? That's exactly what we'll be looking at in part two.